Monday, August 4, 2008

TWST Article on J.Crew's Growth

There is an interesting article about J.Crew which I selected portions of below. For the article in its entirety, click here.

Lululemon, J.Crew: Specialty Retail Growth Opportunities
by the Wall Street Transcript
August 04, 2008

The Wall Street Transcript interviewed Paul Lejuez, Director & Senior Analyst on Credit Suisse's retail research team...

TWST: If we take a little longer-term look, are there growth opportunities in this space longer term?

Mr. Lejuez: Yes. I think domestically there are a few stories that we would say have very clear, visible square footage growth. That is to say, I can look three to five years down the road and see companies still growing.

One name that we would call out that has those opportunities is Lululemon (LULU), for example, which is in its infant stages of getting its store base established here in the United States after developing into a very well established brand up in Canada. ...

TWST: What's the market they're appealing to?

Mr. Lejuez: They sell yoga-inspired apparel, but they are not just selling yoga apparel here...

The other name I would mention would be J.Crew (JCG) in terms of growth opportunities here domestically. They have about 200 full-priced stores. We think there are about 350 "A" malls in this country, and so they could still increase their square footage at their core concept by over 50% over the next several years. There are very few companies that I cover, if any, that can say that. Lululemon would actually be way higher than that; they can triple or quadruple their store base, but J.Crew I think would be the other one that we would call out on the specialty side that has great growth opportunities.

TWST: What is it that gives Lululemon and J.Crew an edge that will allow them to succeed in a tough market?

Mr. Lejuez: Different answers for each.

With Lululemon, what they do so well is that they really become part of the community. ...

With J.Crew, it's a little bit different. I think they operate in an underserved market, or I should say it's not served effectively, which is the young adults/adults market. They just seem to get the product right. They are run by CEO Mickey Drexler, and we'd say he is one of the few rock star merchants in specialty apparel. The way that they run their business is they've managed to put out some of the best fashion on the floor, season in and season out. They do a great job with colors. They do a great job with fit. They are always doing something new and interesting rather than just kind of sitting back and doing the same old thing. I think customers appreciate that, and they want to shop at their stores.

TWST: Is there a risk at J.Crew of being so dependent on Mickey Drexler?

Mr. Lejuez: Mickey certainly is key to the story, but President Tracy Gardner is there as well and I think that under Mickey's leadership she has developed into a very talented merchant. Nobody is going to ever be a Mickey, but I think she is one of the best out there.

TWST: Can Lululemon and J.Crew hold their own from a sales and earnings perspective during times like these?

Mr. Lejuez: We think they should be able to. Certainly, one of the things that drive earnings in retail is square footage growth, and these two have it. ... J.Crew has already shown that their same-store sales number has slowed a little bit, but I think it's important to look at their direct business as well, which represents about 30% of their overall sales, and that has been increasing and growing at a faster rate than retail sales have been. We did a report last week where we basically asked a question, "what if direct sales were included in comps?" and when we looked at our entire universe, J.Crew really stands out as being the beneficiary.

If we were, in fact, to include direct sales in comps, J.Crew's comp would have been 500 basis points higher. As far as we are concerned, as far as the company is concerned and the point we are trying to get across is that the direct sales should be included in the comp. There is very much an indifference, I think, between whether a company makes a sale at a store or online. Direct is a very leverageable, if not more leverageable model. So when you think about companies growing organically and being able to leverage their fixed investments, as far as I'm concerned the direct channel is just as important. Either ring the register or click the mouse. No difference to me or to the retailer.

I must say that the portions of the article that I have in bold, I completely agree with. I think J.Crew has some of the best fashions, with excellent selections in terms of color and fit. When it comes to jackets and coats, I can't imagine buying either anywhere else except for J.Crew. I also think Micky is a rock star when it comes to his visionary leadership at J.Crew (I really do!) :)

What do you think of this article? Do you agree or disagree?
Do you think CEO Mickey Drexler is a "rock star merchant in specialty apparel"?

23 comments:

  1. I totally agree with the fact that Drexler is a rock star CEO. I also agree with the comments on J.Crew's reliability in terms of quality merchandise (in spite of the web site fiasco).

    BTW, I just got an email from J.Crew about their new high-heel flare denim, titled "long leg alert." Nothing, however, to confirm shipping of the items I ordered on the weekend, nor did I receive an email 20% off coupon. Sigh.

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  2. I think Mickey is a rock star, but his philosophy don't scale upward. Remember what happened to the Gap? I hope J Crew stays the same smallish size for a long long time.

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  3. don't should be DOESN'T

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  4. I also agree that Mickey is a rock star CEO...he just has the "it" factor required to reach the market he is aiming for...I just hope I REMAIN in the market he chooses to target. ;)

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  5. I also agree. Rock star all the way. I can only imagine what their corporate meetings are like when the employees are anticipating a speech from him.

    ffm - I hope they don't scale too far up. I think someone mentioned that at a certain price point there are other brands to choose from, I.e. Tory Burch.

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  6. Ditto, FFM. Let's hope we remain part of his target market (I worry, what with the rolex watches, the end of stackable coupons, the "collection" stores, etc.)

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  7. I don't think the Gap ever really recovered from the too much, too soon expansion. I think it's still struggling.

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  8. Mary: I also think jcrew's merchandise is reliable overall- which is why I feel so comfortable ordering items without seeing them.

    I didn't get that email yet. But I look forward to it. :)

    Molly: Drexler might be able to pull off J.Crew as a more prestigious name. He is basically getting designer suppliers to produce items for him at a lower price than the desinger goods with their designer name. For those interested in the designer goods but without the designer price tag, this is a perfect match for them. My only hope is that he doesn't go in such a direction where he drops customers like me, in the process of obtaining those luxury buyers. :)

    FabulousFloridaMommy & Gigiofca & Mary: I know what you mean! Like I mentioned in my comment to Molly, I hope he doesn't drop me in favor of the bigger wallet customer. ;)

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  9. I see now. Luxury means small, right? Is he going to transition all the "affordable" stuff to Madewell?

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  10. Yes, J. Crew's colors are the best, hands down. They offer a good mixture of great colors, instead of ODing on a color like Ann Taylor sometimes does. Now, if J. Crew would just stop making their tee shirts so darned long...

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  11. I kind of like the longer tee shirts...I hate looking like a plumber when I bend over, and a longer tee shirt sometimes does the trick. You know, I see London, I see France...

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  12. I agree with the comment about Ann Taylor. They do montly collections that are based on one or two colors. I love that J Crew follows a color through successive collections, as in Spicy Mustard. I first saw this color (or one similar called "Burnished Olive") last winter and they keep adding new pieces that coordinate. They also show new ways to wear it - in Spring it was with white, gray and silver, in summer it was with hot pink, now it's with purple and burgundy. Nice!

    I was just on their site looking at the "inside our studio" piece and saw a reference to Elizabeth Peyton - I googled her and now I see where a lot of their color influence comes from! It makes me want to pick up a paint brush :-)

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  13. i LOVE the longer tees and tanks-I have a super long torso and they work great on me, esp with the lower rise denim!
    BGD

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  14. I also hope J.Crew isn't trying to price us out. :) I shop there almost exclusively, partly because items fit so well and partly out of laziness (I know I'll like most of the stuff there so I don't do a great job looking around). So I hope I don't have to start re-learning some shopping habits, though perhaps that's best in the long run. :)

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  15. Himmiefan: I am one of those who likes the long tees (like Mary & BGD). It is mainly because I like the extra coverage in case I bend over in low rise jeans. ;)
    But I think they should sell shirts in different lengths. :)

    Molly: I love that "inside our studio" section of the site. I was planning on using that as a post. So fascinating and the colors are fantastic!!!

    Melanie: I know what you mean. I pretty much do 95% of my shopping at J.Crew. I would really hope I am not the "type" of customer who will be replaced. Hopefully we can all be a part of J.Crew's customers. :)

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  16. I agree with the article. Mr. Drexler is a rock star clothing CEO. J Crew has good service and great product (classic, with a twist) and been pretty reliable - website fiasco notwithstanding.

    Interesting to see Lululemon and J. Crew mentioned in the same article - two of my favorite brands, and, as a Canadian, I am happy when a Canadian brand does well. Now, if only J Crew would open a store in Canada, like Brooks Brothers is planning.

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  17. I can certainly trace my J.Crew obsession to Mickey Drexler's rise at the company. Funny how the article points out direct sales as the area for future growth. But, as you can tell from my rants in other threads, even aside from the issues causes by the update, J.Crew is not doing a lot to woo the web customer.

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  18. Namtaro: I agree that the service at J.Crew has been consistently great! I also didn't know about Lululemon until this article. I am happy to hear that you like the brand- I look forward to checking it out now! :)

    Hexicon: I think my love of J.Crew also relates to the time Mickey has been CEO! That is so funny- I didn't even realize that- but its so true for me!!! :)

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  19. Alexis, I can't wait to read your piece on "Inside our studio"

    While we're chatting, I wonder if you have ever looked at Goresuch? I saw two jackets on there that look so J Crew to me, but are 10x the price:

    Livia

    Chantal

    They remind me of Bella and Lexington respectively.

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  20. Namtaro,

    I love Lululemon too! I guess it is a Canadian thing :) Alexis you should take a look-they have really nice active wear and some casual basics.

    I am excited that Brooks Brothers is coming to Canada. I love their non iron shirts for my husband. I used to buy him J Crew shirts but they always had a funny smell when they came home from the dry cleaner so I now avoid shirts that need to be ironed. I did buy him a J Crew shirt this summer when I was in the US. It was some new wash that they had and it was soooo soft. Now if only J Crew could make non iron shirts :)

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  21. molly at 10:21 PM_I rec'd my first Goresuch catalog yesterday and was SHOCKED at the prices. SOme of the sutff is cheesy, some I liked, all of it I could never afford! I had never even heard of it until I got the catalog.
    BGD

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  22. Molly: I have not heard of Goresuch- but I just checked out the links- and wow those are some high prices!! You are also right that those jackets are very J.Crew-ish. :)

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  23. The Wall Street Transcript's interview entitled, "Lululemon, J. Crew: Specialty Retail Growth Opportunities" puts forward that Lululemon and J. Crew share a competitive edge and square foot growth. Based on answers given by the interviewee, this report concludes that these two companies share a similar growth potential. Economically this may or may not be. I am not an economist. But I think that this article is being used as a promo for Lululemon at a time when it is trying to embed itself within the U.S. marketplace. That these two very different companies who treat customers so differently would be discussed in parallel in the same report shocks me to my core. There must be something very wrong with how economists predict a company's success potential. As long as customers are needed to conduct retail business, I would never put Lululemon in the same bracket as J. Crew, and my credit card agrees with me.

    Lulelemon is a Canadian-owned company that since 2006 has extolled certain health properties of the fabrics it uses for its clothing. One 'seaweed' line was touted to contain 'stress-busting' and 'calming' amino acids on account of a 23% seawood compound added to its cotton and lycra fabric. In November, 2007, the New York Times had garments from this line tested by an independent lab when an investor alerted the paper that tests that he had had conducted revealed no discernible seawood component in this line of activewear. The lab used by the NYT reached the same result. This means that a Lululemon T-shirt is no different from any other cotton/lycra T you already own or could buy. When apprised of these results, Lululemon in Vancouver, Canada issued a press statement saying that for the past year it had put this 'seaweed' fabric through rigorous testing and that the company stood by this product. At first, Lululemon's executive would not speak with the press. Within days, a Vancouver retail consultant opined publicly that Lululemon had to take responsibility for this product because the problem concerned more than just this one product because the company has been making 'wellness' claims about all its clothing fabrics since it began operating. A few days later, Lululemon's founder and chairman, Chip Wilson, admitted to the New York Times that the 'seaweed' line of apparel contained no seaweed compound. Worse, Mr. Wilson added defensively, "If you actually put it on and wear it, it is different from cotton. That is my only test of it." Days later when the Canadian press caught up with him, he essentially asked for the public's pity instead of dealing with his negligent misrepresentations. Canadians didn't like this. We are urged constantly to buy whatever Canadian retailers dig up for us to wear, and here was supposedly an all-Canadian company to be proud of. What we got was snake oil.

    So, it is astounding to hear Paul Lejuez, the interviewee in this article and Director and Senior Analyst of Credit Suisse's retail research team, say. "With Lululemon, what they do so well is that they really become part of the community", when what Lululemon did so well was to lie to its Canadian customers en masse about its product, blame it on their supplier, not face its lie about testing, and then insult us by saying that what matters is what a product feels like, not what it is! By community involvement, Mr. Lejuez was actually referring to Lululemon's viral advertising through infiltrating yoga centres so as to sell clothes, which itself is not representative of what community involvement means! What Lululemon needed to do was to respect its customers by showing truthfulness in advertising and by taking responsibility when its lie was discovered.

    As for Mr. Lejuez' passing off the fact that Canadian women wearing activewear everywhere as an indicator of Lululemon's potential success in the United States, that is an equally egregious spin designed to excite Americans where excitement is not due. Canadians have not started a trend, for sure. We Canadian women wear activewear too much because our retailers pay no attention to what we want which is fashion as worn and interpreted seasonally by our sisters around the world, everywhere but here. When we can't get to Europe, the U.S., Asia, or South America to shop because we exhausted our 'clothes shopping travel budget ' on our last trip abroad made to update our closets, those of us into fashion buy the odd cheap thing like activewear or legwear here at home just to feel that we went shopping here one or two days a year. Others of us who are not into fashion or who feel more strongly the link between patriotism and their sweater drawer buy whatever is available here out of pity and desperation. If we don't do that, we are not supporting Canada, you see. (How is it that French women can live stylishly and still be treated as full French citizens while women in Canada must make a choice of allegiance to either their sense of style, or our country's sad retail industry?) Online shopping is a godsend to many of us and my postman has to make extra trips in my area to drop off all the J.Crew parcels he has to deliver to people around me and whom I don't even know. He asked me who J. Crew was so that he could buy something really nice for his wife. Of course, I gave him J. Crew's details. So, Mr. Lejuez did not even skim the surface of why Canadian women wear activewear so much and yet he used what he saw just with his eyes to extrapolate a conclusion that Lulemon would also 'catch on' in the U.S, without even attempting to understand the culture-specific reason for its popularity here. Lululemon let Canadians down by recklessly not identifying what they were selling, by not testing the materials they were using and upon which they based their consumer appeal, by misleading us, by not offering us any assurance that it would behave differently in the future, and ultimately by seeking our pity for their cocky and unbased claims.

    Contrast Lululemon's modus operandi with J. Crew's commitment to its customers even now during a major system change that has customers worried because goods have been slow to arrive, etc. While this has certainly been frustrating, J. Crew's personnel from the bottom on up do everything they can to smooth the ride during this period. And, at all times, J. Crew informs its customers honestly and fully about its products and the components used to make them, including the country of manufacture. It directly commissions manufacturers to produce yarns and textiles -to its own express specifications in many cases; it tells you where finished items are assembled if you ask. It monitors its commissions. In these ways, J. Crew proactively ensures that the customer always knows what she/he is buying. If reliability and truthfulness are considered indicators of potential success, then Lululemon would never be mentioned in parallel with J.Crew.

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Dear J.Crew Aficionadas & Aficionados: Please feel free (and encouraged) to share your thoughts and opinions. :) However, please note that this is still a personal blog. So comments that are considered inappropriate (e.g. obscene, racist, homophobic, personal attacks, rude, and just plain mean) will be removed.

And now back to J.Crew! :)