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Almost four years ago, Millard "Mickey" Drexler left Gap (GPS) under a cloud. The chief executive had presided over the company during several years of poor financial performance. In the wake of a disastrous first quarter in 2002, when sales at U.S. Gap stores plummeted 20%, the San Francisco-based retailer announced Drexler's departure after 19 years with the company.
Now, Drexler is back in the limelight. On June 28, New York-based J. Crew (JCG), the preppy clothing chain that Drexler has led since 2003, went public and saw its shares jump 28%, to $25.55, on the first day of trading. It was one of the strongest initial public offerings of the year, a performance that confirmed Drexler's turnaround of the company and put him solidly back in Wall Street's good graces. "It goes to show that he has reinvented himself," says Wendy Liebmann of consultancy WSL Strategic Retail in New York. Anne Brouwer, partner at Chicago retail consultancy McMillan/Doolittle, adds, "I'm sure he's feeling very good right now."
Wall Street's eagerness to try on J. Crew reflects its confidence in Drexler's merchandising makeover. Founded in 1983, J. Crew became synonymous with East Coast prep—lots of chinos, woven button-downs, and sweaters in pastels and solid private-school colors. But in the years leading up to Drexler's arrival, J. Crew was flailing with trendy styles, such as too-tight tops, and sliding downscale with frequent discounting. Sales were slipping, and the company was losing money.
LOTS OF COMPETITION. Drexler, whom the industry once dubbed "the Merchant Prince" for his fashion savvy, dumped the trendy togs and revived classic styles such as casual T-shirts, cable-knit sweaters, and blazers. To add a dash of high-end cachet, he introduced pricier items, including $1,000 cashmere jackets, Italian-made shoes, and accessories of English leather. He added a limited line of bridal wear, ranging from $300 to $1,800 for a dress in duchesse satin, with elegant bridesmaid dresses that actually could be worn after the wedding.
With those merchandising shifts, J. Crew today is competing less with the solidly midmarket Gap, its onetime rival, and more so with more-upscale brands, including Polo Ralph Lauren (RL) and its Club Monaco division, and Urban Outfitters' Anthropologie women's chain. J. Crew is also likely attracting department store customers and younger shoppers outgrowing chains such as Abercrombie & Fitch (ANF), says Brouwer.
J. Crew's financial results tell the turnaround tale. Last year, the company's overall sales increased 18.5%, to $953.1 million. Net income totaled $3.8 million, vs. a loss of $100.3 million the prior year. And sales at stores open at least a year (same-store sales), a key measure in retailing, grew 13.4%. By contrast, same-store sales at specialty retailers as a whole have been growing at less than 4% to 5% annually.
The success has already made Drexler a wealthy man. He owns 12% of J. Crew after the stock offering, a stake valued at $174 million based on the stock's closing price on June 28. In addition, Drexler was granted options on 77,432 shares in the last fiscal year, according to the offering documents filed with the Securities & Exchange Commission.
HEAVY DEBT LOAD. Despite the recent performance, Drexler and J. Crew are still at the mercy of fashion's vagaries, and bad merchandising calls can fray sales instantly. Indeed, some of Drexler's troubles during his final years at Gap resulted from poor fashion decisions on his watch. (In one particularly ill-fated foray in the fall of 2001, Gap bet big on supertrendy "blasted" and "shattered" fabric finishes on denim jeans, which flopped.)
J. Crew is also heavily in debt, although it's using much of the proceeds from the stock offering, which raised about $375 million, to pay down about half of its debt load. Ratings agency Moody's Investors Service on June 19 said that the partial debt repayment "will result in a significantly stronger balance sheet and credit metrics" and that it's considering upgrading J. Crew's remaining debt of about $350 million.
Drexler appears to be avoiding the kind of massive store expansion that he oversaw at Gap, a move that ultimately dragged down that company's financial performance. But he's still edging into new retail concepts. He recently launched Crewcuts, a store selling J. Crew styles whittled down for the school-age set. So far, the company has opened only one standalone Crewcuts store, in Dallas, although it sells some kids' clothes within about a dozen of the company's 166 core stores.
Analysts say the kids' selection, including cotton tennis sweaters and even bow ties, appeals to moms who want their kids to wear the traditional look. "And even if you don't have children, you almost want to buy a little doll and dress it up," says Liebmann.
Lee is a correspondent in BusinessWeek's Silicon Valley bureau
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