How Texas Pacific Cleaned Up at J. Crew

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Texas Pacific also cut back on the number of J. Crew stores. It had built up the number over the years, from around 80 to more than 200. But faced with the need to cut costs, it closed about 20% of the locations, according to Phan. Today the company has about 175 retail sites. Again, that would have been hard for the management of a publicly held company to do. "No CEO wants to be head of a shrinking business," Phan said. But as a smaller company, J. Crew wasn't obligated to sell me-too fashion to the masses.

With the freedom to find a niche, J. Crew experimented with its product lineup. It moved beyond the basic, preppy look without drifting too far over the edge. Many retail experts believe Gap has failed to take enough risks, and has lost its edge to rivals such as Abercrombie & Fitch (ANF).

Slow and Steady

Most important, Texas Pacific gave J. Crew something it never would have found as a turnaround company in the public markets: time and patience. It didn't have to show the same kind of quarterly improvements that are expected of public-held companies.

There was a slow, but steady return to growth. Operating losses narrowed in 2003 and 2004, until the company began producing operating profits toward the end of that year. Profit margins steadily increased from the 30s to the 40s, as unprofitable stores were closed and debt with interest rates of 14% or more was refinanced. For the third quarter of 2006, J. Crew reported that revenues rose 23%, to $275 million, and that comparable store sales (sales of units open at least a year) were up 3% and Internet and catalog sales were up 18%. Net income was $26 million, reversing a slight loss in the third quarter of 2005.

TPG took J. Crew public again last summer. About one-third of the company was offered to the public in an IPO that raised about $400 million and valued the entire company at $1.2 billion. TPG's stake was worth nearly $700 million. As J. Crew's stock has surged, the value of TPG's gains, both realized and unrealized, have increased to about $1 billion.

As for Drexler, his 12% stake is worth several hundred million dollars. Such profits may provoke outcry in the public sector, where extravagant CEO pay is controversial. But with the success of J. Crew, Drexler certainly has the backing of the largest shareholder, TPG.

Rosenbush is a senior writer for BusinessWeek.com in New York.