PRINT THIS STORY:

CHANGE TEXT SIZE:

RESPONDING TO TREATMENT

Drexler’s prescriptions improve J. Crew’s sales, reviews

BY CURT HAZLETT

Everyone loves a comeback. It’s no surprise, then, that retail industry eyes are fixed squarely on Millard S. (Mickey) Drexler. Having gone from genius to scapegoat as CEO of Gap, Drexler is now two years into an attempted resuscitation of J. Crew, the onetime king of preppy chic that nearly flat-lined before he came aboard.

How’s he doing so far? Pretty well, by most accounts. The retailer’s 2004 merchandise, the first to bear Drexler’s full stamp, won praise in the fashion press for its strong colors, catchy detailing and improved quality. More important, J. Crew’s financial picture is brightening after years of deep losses, and the company is charting an expansion in hopes of getting back on top.

No one is dismissing the challenges he faces, however.

“The focus, the quality of the merchandise, the colors — everything, clearly, is a tremendous improvement,” said Howard Davidowitz, chairman of New York City-based retail consulting firm Davidowitz & Associates. “This was a company that was lost. But the book is still out on them. They’ve got debt coming out of their ears, and they’re going up against powerful players with monster balance sheets.”

It is beyond dispute, of course, that the specialty retailers that J. Crew is up against — Ann Taylor Loft, Gap, Zara, to name a few — are fierce competitors. But it is also clear that the company has moved its financials in the right direction.

J. Crew reported third-quarter operating income of $13 million in December, compared with a $6 million operating loss a year earlier, on revenues of $206 million, which were up 36 percent. Though the chain posted a $10 million net loss for the quarter, it was a big improvement over the $24 million it lost the year before.

Comp-store sales, meanwhile, rose 30 percent; a year earlier they had fallen 8 percent. And gross margins crept up to 43 percent from 40 percent as the company got its inventory under control and began to wean itself off markdowns.

“The first half of the year was about margin improvements, and the second half was planned as a sales growth story,” CFO Amanda Bokman told analysts in December. The retailer also struck deals in the third quarter to refinance debt and cut costs.

Crew’s crew
At the center of these changes is the legendary Drexler, whose merchandizing touch made Gap an American icon. Forced out in a dispute with Gap’s board in May 2002 following a run of losses, Drexler was hired early the next year by Texas Pacific Group, the majority owner of J. Crew. In addition to becoming CEO, Drexler invested $10 million of his own money in the struggling company. He brought aboard a cadre of Gap alumni, including Old Navy chief Jeffrey Pfeifle, whom he hired as J. Crew’s president. The new team reinvigorated J. Crew’s stodgy merchandise with hot colors and more-interesting designs, then moved toward more-luxurious offerings, such as cashmere sweaters from Italian manufacturer Loro Piana. As the selection of high-quality goods went up, so did prices and margins.

But the fierce competitors remain.

“You’ve got Banana Republic, who’s right in their underwear,” said Davidowitz. “Additionally, you’ve got a lot of foreign players like Zara, who are coming in and building beautiful stores, and you’ve got all of your Ann Taylors and everyone else. Everybody wants a piece of the apparel pie. “Drexler is fantastic,” Davidowitz adds, but “he needs time. This is a very tough thing.”

Whether J. Crew survives in the long run “is anybody’s guess,” said Faith Hope Consolo, chairman of the retail sales and leasing division of Prudential Douglas Elliman, a New York City brokerage firm. For too long, its apparel “looked too much the same, with fake ballerina shoes and knockoff sweaters,” she said. Success will require “something young and fresh and non-catalog-looking. They need to get it a little younger. They’ll have to go for cutting-edge advertising and visible locations if they want to be in the running.”

In fact, new stores are in the cards. Holly Cohen, J. Crew’s vice president of real estate, says the company plans to increase its roster of 197 stores (156 retail and 41 factory) by seven this fiscal year. The following year’s goal is to add about 20 retail and 10 factory stores, though Cohen says the numbers remain “fluid.”

“It will be one of the biggest expansions in our history,” said Cohen, who joined J. Crew last May after nearly 15 years with Gap. “We are in the process of a tremendous turnaround.”

Noting the retailer’s shift toward higher-end merchandise, Cohen says the expansion will focus on areas with high incomes and density. “The customer we want is the affluent, fashion-conscious customer,” she says.

And with only 156 retail stores, Cohen describes the country as “wide open” for new J. Crews. She is looking at premier centers of all types — shopping destinations with luxury tenants, both urban and mall. Asked what a model location is for J. Crew, she points to existing stores in The Mall at Short Hills, in New Jersey, and The Westchester, in White Plains, N.Y., both posh locations.

Gwen MacKenzie, vice president of retail investing in the Irvine, Calif., office of the Sperry Van Ness brokerage, says she believes that J. Crew will increasingly head toward ‘A’ malls, high-end lifestyle centers and streetscapes, adding she is optimistic about J. Crew’s comeback. “A lot of what’s in the malls has no distinction whatsoever, but they’ve really pushed the envelope,” she said. “That can be risky, but there’s definitely a feeling of excitement and energy, and people are willing to pay more for something that’s distinctive.”

But some wonder if J. Crew’s own pockets are deep enough to see its plans through. Davidowitz points to Abercrombie & Fitch’s 33,000-square-foot flagship, which is to open this year on Fifth Avenue, one of the world’s premier shopping streets.

“Can you imagine what Abercrombie is paying for that?” he asks. “Drexler, instead of having cash, has debt. Does he have the financial flexibility to make this work?”

A fair question, some acknowledge. But Ann Brouwer, senior partner at Chicago retail consulting firm McMillan/Doolittle, says she is nevertheless betting on Drexler.

“Most of the strong specialty retailers carry almost no debt,” she said. “It’s not necessarily an easy marketplace to compete in. But Mickey Drexler is a tremendous merchant, and he understands that customer.”