Tuesday, June 17, 2014

J.Crew Struggles {Mickey Drexler Definitely Does Not!}

"Thanks!" to Stapelia N. who shared the following article from the Bloomberg (click here to read in its entirety & to watch a video).
CEO Drexler Amasses $350 Million as J.Crew Struggles
By Lindsey Rupp, Carol Hymowitz and David Carey
June 13, 2014

Mickey Drexler has amassed more than $350 million from the leveraged buyout of J.Crew Group Inc. even as he struggles to revive sales and restore the apparel chain’s fashion cachet. Three years after taking the retailer private with private-equity firms TPG Capital and Leonard Green & Partners LP, J.Crew’s chief executive officer is battling slowing sales as shoppers decamp to more affordable, trendier rivals. The challenges reduce the likelihood of an initial public offering this year and make J.Crew less appealing to a potential strategic buyer such as Japan’s Fast Retailing Co.

“Mickey has done very well for himself,” said Eric Beder, the managing director of equity research at Brean Capital LLC. “But J.Crew has to reinvent itself given the prevalence of fast fashion and a customer who isn’t paying up that much for basics, which is a large part of the brand.

Drexler invested $11 million of his own money when he was named CEO in 2003. In the 2011 buyout, his stake was worth about $301 million -- he pocketed $202 million of that and rolled the rest into an 8 percent stake, according to company filings. He also got $55 million in dividends as part of the $681.5 million J. Crew has paid the owners since going private.

In all, Drexler, 69, has accrued about $380 million since becoming CEO, including options awards, salary and bonus, according to company filings and a Bloomberg News analysis. He and his private-equity partners have recouped over half their $1.23 billion investment.

Possible Sale
In February, two people with knowledge of the matter said J.Crew was in talks about a possible sale to Fast Retailing, which owns Uniqlo. Last month, Drexler said there were no immediate plans for an IPO or sale. The bonds J.Crew sold last year to finance the dividend are indicating diminished odds that the retailer will explore a stock sale anytime soon.

...Initially, Drexler was just what J.Crew needed. After the former Gap Inc. CEO joined in 2003, the chain quickly morphed into the go-to place for younger shoppers looking for stylish T-shirts and making investment purchases of cashmere sweaters; career women couldn’t seem to get enough of the pencil skirts and oversized blazers.

When First Lady Michelle Obama wore a J.Crew cardigan while gabbing on Jay Leno’s couch in 2008 and the first daughters donned Crewcuts, the children’s line, for President Barack Obama’s inauguration, J.Crew reaped fashion status comparable to superstars such as Ralph Lauren and Donna Karan.

Key Rationale

But by the time Drexler took the New York-based company private, it was starting to flag. A key rationale for the $3 billion buyout was giving Drexler an opportunity to work his magic again without Wall Street watching his every move.

It hasn’t happened. Though store mannequins are skillfully designed to prod shoppers into buying outfits for day and evening, there’s a sameness to the fashions, said Shaz Kahng, who advises private-equity and hedge-fund firms about retail and luxury goods. As prices have crept up, younger shoppers, once a mainstay, have fled to Uniqlo, H&M and Zara, she said.

Elleree Erdos, a 24-year-old associate at Craig F. Starr Gallery in New York, no longer gets her basics at J.Crew, as she did in college. “Their basics are a little pricey,” she said. “And their statement pieces are just so branded that if I got a dress at J.Crew five of my friends would say, ‘So-and-so has that dress,’ and that’s not what I want in clothes.”


Creative director Jenna Lyons, a style icon who appeared on the hit HBO show “Girls” and is a walking advertisement for J.Crew, is under pressure to recapture her fashion mojo. She may be counting on the fall collection, which includes slim-fitted coats in an array of hues and wide cropped pants.

The company reported a first-quarter net loss of $30.1 million, compared with income of $29.3 million a year earlier. Revenue rose 4.9 percent to $592 million as gross margin slipped to 38.7 percent from 44.7 percent. J.Crew incurred a one-time refinancing loss of $36 million in the quarter.

Citigroup Inc. credit analyst Jenna Giannelli projects earnings before interest, taxes, depreciation and amortization of $294 million for the current fiscal year, down 21 percent from last year. If operating results continue to decline, the company said this month that it may write down the value of the business.

Boosted Debt
While J.Crew funded the first dividend with cash on hand, it boosted debt by half a billion dollars to $2.05 billion to pay the second one. Cash generation has shrunk, with free cash flow after interest falling to about $40 million in the 12 months ended May 3. The company had $128 million of working capital at the end of the first quarter and a $250 million credit line.

Like many U.S. apparel chains, J.Crew is looking abroad for growth. The company operates three stores in London, two in Hong Kong that opened in May, and 12 in Canada. In an interview in Hong Kong last month, Drexler said he’s targeting capital cities, including Paris, where the chain plans to open one or two locations by the end of 2015.

The ambition is to go slow and do it well with great integrity, and not do it quickly and lose the quality control,” he said. “When we see the right location, we will take a shop. We’re not looking everywhere and anywhere.”

Beder said Drexler is smart to do the international push while the company is private because of the ramp-up costs. Capital spending has surged 35 percent since fiscal 2011. Still, because J.Crew is a “uniquely driven American product, we’ll have to wait and see if it resonates with Europeans and Asians,” Beder said.

New Markets
In a statement today, a J.Crew representative said: “We are very pleased with the performance of our initial stores in both the U.K. and Hong Kong which are exceeding expectations and rivaling some of our best stores here in the U.S. We’re also excited to explore new markets in both Europe and Asia to open additional stores where we find great locations.”

On a recent Saturday afternoon, J.Crew’s store on London’s fashionable Regent Street was a quiet oasis after the crowded street; none of the checkouts was permanently staffed.

David Anthony, a 46-year-old display manager at a chain of coffee shops, was among the handful of customers browsing the store. He found a cardigan he liked but wasn’t prepared to drop 248 pounds ($420). “Why should I pay that kind of money if I can get something not dissimilar at Zara or H&M?” he said.
This article and the article discussed in last week's "J.Crew's Got an Inventory Problem {no, really?}" post, showcase a store that is struggling to stay on top of their game. J.Crew is still doing well compared to other retailers- as the industry is struggling in general.

My unsolicited advice for J.Crew, to turn things around, has not changed:
  1. Offer kill prices for sale items that are a year old. Seeing those items in the sale section, with the same high price point season after season, impacts how customers see the rest of the sale section. (For example, many of us don't bother checking the sale section because we are tired of seeing the same things.)
  2. J.Crew needs to offer "classic with a twist" offerings again. For example, more perfect shirts with Liberty for London prints. ...And Summer maxi dresses that are fitted, as oppose to shapeless sacks. ...And bring back custom-prints like the one on the Veruschka Dress.
  3. Hire a really good stylist. Treat the catalog, er style guide, like the store mannequins and make customers want to buy the whole outfit.
Trust when I say that I still buy my fair share at J.Crew because they still offer pieces I love. (Right now, it is the only store I buy clothes et al from.) My suggestions just come from a place where I want to see J.Crew back on top. :)

Other tidbits:
  1. I thought it was interesting the article & the video associated with the article stated younger shoppers (those in their 20s) are turning away from J.Crew.
  2. I am super excited about the Fall Collection. Slim fitting coats? Array of hues? I am in!
  3. Dayum! Mickey got a great return on investment turning $11 million into $300 million in less than 10 years. If only I could get such a return on my savings... ;)
What are your thoughts on the article ? Do you think J.Crew will continue to perform well under Mickey Drexler? Any points caught your interest? :)


  1. It is time to enjoy those millions and leave.

  2. We've all talked about how J Crew left its roots behind when it joined the fast fashion trend. Maybe they can leave that to the new J Crew Mercantile and get back to what J Crew used to be. But broader appeal and more stores unfortunately usually leads to lower quality and less imagination.

  3. Less penny-pinching! How about seams that are nicely finished with decent allowances? How about hems more than an inch deep? How about real silk, of a decent "hand" and weight? How about saying goodbye to polyester? And how about more all-leather shoes?

    And how about hiring a real women's designer?

    I don't think styles necessarily need to go back ten years, but quality and attention to detail certainly do.

    And as for Dear Leader... Well, if you can't say anything nice -

    1. Agree about the all-leather shoes! At the very least, all-leather uppers please! Enough with the patent & fabric pumps & loafers.

      My feet pine for supple all-leather valentinas & vivs.

    2. I am so with you on quality. It is what I came to JCrew for in the first place. Quality, quality, quality on the inside and out, otherwise what is the point?

  4. sitting on their laurels, thinking that what was working 4 years ago is what works now. $45 for a thin Tshirt just doesn't cut it no matter how cute it is, then markdown to 29.99 for a year?
    Good article, hopefully JC will incorporate changes before its too late, there are soo many choices to shop

  5. What lost me was the pants. I am tall and went to JCrew for linen pants (not capris) and slacks that werent necessarily part of a suit. But nowadays their competitors have tall pants in cute styles for less. I agree with the statement about the quality isnt what it used to be. I have definitely cut back my spending at JCrew.

  6. I just hope they start doing better soon. I have a $250 gift card and I can't find anything worth spending it on. They've had a few prints that have been hits the last few seasons but nothing right now.

    I do think their workwear is excellent. They've done very well in that category by me.

  7. If I see another Liberty print shirt I'll scream. I have enough and they have overdone it with the prints....Just me but one can only own so many flowered shirts!

    1. I only have a couple of Liberty shirts, but other people, especially new customers, may not have any. I actually get more excited about J.Crew prints than Liberty prints. They need someone in the dress department because the dresses are really boring. I also hope they don't cancel the catalog/style guide.

    2. YES, would love JCrew to go back to making some of the great old prints. Just so tired of Liberty. You can buy them lots of places including Boden and other UK sites as well as US sites.

  8. I feel like J.Crew doesn't really have a clear "identity" right now, if that makes any sense.

    Zara's turning over minimalist designer knock-offs like crazy (and getting tons of publicity on blogs for it the way the Crew used to), H&M and F21 are killing it with the younger set who were too young to wear the '80s and '90s trends the first time around, Uniqlo is moving in fast on the basics business, and even Loft is trying something new with their Lou & Grey line.

    J.Crew has some good ideas and some nice designs, but then they tend to run those into the ground (ruffles, capris, bedazzled sweatshirts) without really defining the rest of their business.

    I have lots to say on the merchandising issues, but at the risk of being all tl;dr, I'm just going to leave it at that.

    1. Oh let's hear it on the merchandising, disco george. I'm sure I'm not the only one who would love to read what you have to say.

    2. Gigi -- another day when it's not the World Cup, I will go into more details! ;-)

    3. disco george - lol Well then you will appreciate this Beckham flashback. ;)

  9. This is interesting. They grew their business to a certain pointed--supported by the shoppers on this blog.

    They grew even more by becoming a "fashion company," which has clearly irked some people on this blog, who want their "classics."

    So, now, JCrew is a certain size. To continue growing, they need more shoppers. But the young shoppers are getting their basics elsewhere, and the older guard don't like the "fashion" items.

    I don't see what the fix is--other than to not grow so much and that of course is not what a business wants.

  10. What struck me: EBITDA (earnings before interest, taxes, depreciation and amortization) down 21%. That is huge! And with all the old inventory - they have set themselves up for another hit in the future. FYI - EBITDA is short-hand for cash flow generated by a business.

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  12. There is a fix: offer a mix of "fashion" items and the classics that J. Crew is known for. I look at my jackets from years ago, with the beautiful fabrics and the contrasting ribbon seams, and the sweaters and shirts made of natural fabrics and that feature quality workmanship, and there is a definite contrast between them and what is offered now: way too much polyester and acrylic, cheap silk that tears after a wearing or two, seams that start to separate, etc. No one is doing what J. Crew used to do, except at price points that are much higher, so there is still a market for quality, and for styling that isn't just plain silly.

    1. Denise: Couldn't agree with you more. I look at my older blazer and jackets and see nothing like that anymore in the stores. Something is different. I still shop and spend with the crew - but it's not as exciting as it once was.

  13. Disco George - I agree completely on the Identity question. Awhile back I said that I feel J Crew has three style directions - one meant to compete with Barneys, another for Talbots, and a third for Target. But frankly none of those directions are going well.

    I'm not someone who says that the old days are better. But it does seem that J Crew went from being unique to being...nowhere.

    Agreed too with st who wants better dresses.

  14. So we hear that Jenna is in the hotseat - where is Tom Morra in all of this? Isn't he the women's designer?

  15. I know almost everyone will disagree, but I HATE THE SALES! Not sales in general, just JCrew sales. You never know what is going to be discounted and when, items pop on and off sale on a daily basis, and quantities available change equally strangely. Who offers a sale on a shirt, but only make half of them available, then raises the price on the remainder? I feel so used. Cannot trust JCrew's price/quality ratio at all and that prevents me from pushing the button time and time again. Jcrew, Please price sensibly in the first place, and save most of the sales for product that is not moving.

    1. ITA,
      and Final Sale for first markdowns, I have passed on many items as I would like to see how they work in my wardrobe but not at a FS, and they just sit in the store for ages.

  16. By the way, loving Madwell these days, even if a lot of the dresses/skirts are too short for me. (Which I accept, it's that kind of market.) I could happy purchase the rest of their offerings, which feature natural fabrics, clean lines, charming prints, European sensibility and reasonable prices.

  17. I haven't bought any j crew piece since april. I've been buying cheap jeans from uniqlo, and nice coats from burberry. I still have cardigans, tippi sweaters, multiple j crew blazers that i wear quite often for this season. I will only buy j crew when on sale thou, cause we all know they will always end up on sale! The thing about j crew is just the style, they need a good stylish, sensible one! I want to look at a picture of an outfit and want to buy it just like the picture. Lately there's too many weird prints and odd materials, funky designs that are way too expensive for what it's worth. I don't mind spending hundreds or even a thousand on a clothing item that is super stylish and fits well, and wears well too. Material is super important. Stick to natural fibers that are soft and durable, 100% cotton, 100% wool, and 100% silk.

  18. The main problem for j crew and other retailers is the economy. It's horrible. People aren't spending money like they use to, they've completely changed their shopping habits and technology is changing how we buy everything. It's a sign of the times and companies have to reinvent themselves. Disco george nailed it, they've lost their identity. They are trying to please too many customers and they're doing this because of mickey drexler. he came into j crew and turned it into gap inc. Mass produced, cheap clothing while STILL trying to appeal to a high end clientele. I love j crew, especially collection. I mix J crew with other high end designers, but i don't want to see my sweater on sale and on 1 million other people. J crew use to be unique and more exclusive. This is what happens to companies that expand so big. They need to become unique again, become a leader and do what no one else is doing. Customers will spend money to be unique and feel original. They're no longer spending a lot of money on plain basics when they can get the exact same look cheaper at a million other stores. Customers can get a cotton blouse and khaki shorts at target, but they can't find the Collection Eyelet Flounce top, or the beautiful printed popovers or the embroidered pom-pom maxi dress anywhere else. I'm not suggesting they should get rid of their classics, but they need more uniqueness! And they need LESS inventory which will lead to less sales! They need to get back to unique styling that made people take notice of the brand. The current styling is boring. As for the fabric content, polyester, it's another sign of the times- All high end brands are using it now. I agree with Genny- no more liberty prints or really any kitschy juvenile prints. There are too many and it's like carrying a vera bradley purse- outdated and not fashionable.

  19. "wide cropped pants" for the Fall collection??

    1. Ha, I had the same thought! Like, gauchos? Yikes.


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And now back to J.Crew! :)