Since former Gap Inc. CEO Millard Drexler took over the leadership of J.Crew Group Inc. in 2003, the merchandising guru has worked magic on the once struggling retailer, transforming it into one of the hottest fashion chains.
Now, the New York-based fashion retailer known for its colorful preppy clothing plans to go public next week in what's being touted as one of the biggest retail IPOs in recent years. How successful J.Crew will be in the public market is unclear, but its success with consumers has been a bright spot in an industry continually undergoing consolidation.
J.Crew should also be able to weather an expected consumer spending slowdown later this year because its well-heeled customers seem to care more about getting the latest cargo jacket than they do about higher gas prices.
"It's all about retail management. You have to have the vision, the knack for picking the right merchandise," said Patricia Edwards, who helps manage retail funds for Seattle-based Wentworth, Hauser and Violich investment counselors. "This is something new to invest in at a time when everything is shrinking. There is so much disarray in retailing right now."
The latest retail industry consolidation came Thursday when Federated Department Stores Inc., which bought the famed Lord & Taylor chain when it acquired May Department Stores Co. last year, announced it was selling L&T to a property development group. Meanwhile, by September, Federated will have converted most of its mid-brow May Co. stores to the Macy's brand, transforming it a national fashion retailer with more than 800 stores.
And Saks Inc. has been disposing of its mid-price department store chains to focus on its luxury business, which include its Saks Fifth Avenue stores, saks.com and its outlet stores called Saks Off 5th stores.
Amid the upheaval, a number of new retail concepts are appearing, but most are coming from already established fashion merchants. Gap, for example, is expanding Forth & Towne, an offshoot launched last year to cater to baby boomers. The company, however, continues to struggle with the fashions at its namesake stores.
Swedish cheap chic fashion retailer Hennes & Mauritz AB said Wednesday it will start a new upscale men's and women's fashion chain under a separate brand name.
J.Crew has managed to reverse its fortunes and get onto a growth track. Under Drexler, J.Crew resolved a long identity crisis, returning to its preppy roots while also offering more upscale merchandise. Its clothes range from $20 cotton T-shirts to $550 tuxedo jackets for men.
In early June, the company - which sells its clothes through 164 retail stores, 45 factory stores, a catalog and a Web site - reported a 60 percent increase in first-quarter profit as sales showed double-digit gains. Business at stores open at least a year, known as same-store sales, rose 12 percent in the first quarter, compared to a 37 percent increase a year earlier. Same-store sales are considered a key measure of a retailer's health.
For fiscal 2005, J.Crew posted net income of $3.8 million compared to a loss of $100.3 million a year earlier. Revenues rose 18.5 percent to $953.2 million
"The company from an operation perspective is performing extremely well. They're outperforming their peer group," said Maggie Taylor, vice president and senior credit analyst at Moody's Investor Service.
In May, J.Crew also announced it was developing a new chain of casual women's clothing stores called Madewell, which will focus on key fashion basics like chinos. That follows the launch of a wedding collection in 2004 and the unveiling of "crewcuts", a children's collection this year.
Meanwhile, J.Crew plans to add between 15 and 30 stores this year, and thereafter open between 25 and 35 annually, according to a Securities and Exchange Commission filing last week.
Edwards believes J.Crew's IPO comes at a good time. The company planned to go public last year but postponed the offering until this year; it didn't offer an explanation for the delay.
"This is the time to grow. This is the time of opportunity. They need to take advantage," Edwards said.
She added that even with consumers expected to slow their spending in the coming months, J.Crew shouldn't be as vulnerable as moderate-price apparel chains since it caters to people - from boomers to young trendsetters - with extra disposable dollars.
J.Crew plans to raise $279.8 million in net proceeds through the IPO of 18.8 million shares, estimated to be priced at $15 to $17 a share, according to the SEC filing. The proceeds will be used mainly to redeem the company's preferred stock.
According to Richard Peterson, a research analyst at Thomson Financial, J.Crew's IPO is the biggest retail IPO, excluding restaurants, since 2002, when Petco Animal Supplies Inc. raised $275.5 million in a stock sale.
J.Crew has applied to the New York Stock Exchange to trade under the ticker symbol JCG. Goldman, Sachs & Co. and Bear, Stearns & Co. Inc. will be the lead underwriters.
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