J. Jill: Marching Up the Apparel Hill


By Amy Tsao What's so stylish about ankle-length denim skirts and pastel linen blouses? Nothing, really. But the relaxed, well-made garments at women's clothing company J. Jill Group (JILL) have won a steady following of catalog and Web customers the past several years. The somewhat artsy outfits have become a staple for older women, who have far fewer clothing choices than their teenage and 20-something counterparts.

"It's not all about tight-fitting clothes for teenagers," says J. Jill shopper Beth Karlin, who's from the New York City area. "I was surprised at how much I liked the stuff and how wearable it is. The fabrics were pretty and comfy."

And now, this small, relatively unknown company is taking its business to the next level. Investors searching for a winner in the retail sector may want to take a closer look. In the early stages of opening retail stores, the company, which had $287 million in sales and net income of $13.1 million in 2001, is on a growth trajectory that its competitors can't match (for an update on apparel giant Gap's prospects, see BW Online, 4/9/02, "Is Gap Dressing for Success?").

With just 54 stores, it figures it can expand to as many stores as the Talbots (TLB) chain, which had 800-plus at the end of 2001. "We can be anywhere there's a Talbots. The malls they're in, most of them we would be in," says CEO Gordon Cooke. In 2002 alone, J. Jill plans to open 35 to 40 stores.

CHASING CHICO'S. Some investors have already recognized the potential of Quincy (Mass.)-based J. Jill, which in addition to Talbots, competes with Chico FAS (CHS) and Ann Taylor Stores (ANN). J. Jill's shares have climbed about 26% so far this year to about $27, giving them a price-to-earnings ratio of 21 based on forward-looking earnings forecasts. It's more expensive than Talbots shares, which trade at a p-e of 14, but cheaper than Chico's multiple of 23. And J. Jill looks poised to do as well as Chico's, its Fort Myers (Fla.) competitor that has been one of the best performing retail stocks in recent years.

So far, J. Jill's transition to higher-margin retail stores seems to be working. "I think they've been executing very well, particularly in light of the economy," says Jeff Klinefelter, an analyst at U.S. Bancorp Piper Jaffray. Analysts project that 2002 earnings per share will grow an average of 23%, to $1.29, up from $1.05 in 2001, and gain 18% in 2003, to $1.53.

Though the risk of building stores is higher, the economics of retail sales is much more rewarding than direct selling via the Internet and catalogs. Klinefelter figures operating margins in retail sales are north of 15% to 18% in a good economy, while the direct business is more like 6% to 8%." He adds: "The challenge that the management team will have is to establish a core competency in the retail side vs. the direct side of the business."

AGE ADVANTAGE. J. Jill's corner of the apparel market has strong demographics and broader market trends working in its favor, says Lauri Brunner, an analyst with RBC Capital Markets. Affluent middle-class women, like 50-year-old Karlin, are clearly among the most consistent and financially attractive consumers around. And over the next decade, these buyers will grow disproportionately. "This demographic is so hot because of how much these women are willing to spend on clothes. The 30-and-over age base is strong and looks very good going forward," she says.

A high level of dissatisfaction with the alternatives is also working in J. Jill's favor. "I hate department stores," says Karlin. "I just went to [one] over the weekend, and it was a nightmare. The sales people were fighting with each other, and nobody could help me find what I wanted." Adds another J. Jill shopper, 39-year-old Lisa Ann Smith Salkever of Honolulu: "I don't like shopping for clothes enough to brave crowds and hassles for it. Therefore, catalog shopping is better. Plus, I can send things back if they don't fit without any hassle."

Says J. Jill's Cooke, who has 17 years of sales and promotional experience with Bloomingdale's: "Our stores have created an oasis." Each store has an atrium area outfitted with planters and drapery as well as "a lot of creamy, softer lighting, sconces, chandeliers." He figures the store is less cluttered, with about a third less merchandise per square foot than Talbots. For now, J. Jill gains most of its revenues through the Web or catalog -- just over one-fourth of sales came from stores in 2001 -- although the CEO expects those dynamics to shift dramatically.

STABLE OF CLASSICS. The right merchandise is the key to any retailer's success, and Cooke says J. Jill has a handle on that. His expertise is in brand building, but his merchants know how to adapt a popular T-shirt or dress style to its more mature clientele a year or two after they hit trendier stores. "We adapt much more moderately," Cooke says.

Though it isn't a runway trend leader, J. Jill's product mix appeals to women who are often less interested in the latest fashion than having a stable of classics. "Our customer is looking to evolve the wardrobe. They don't want to throw stuff out," he says.

However, the near-term outlook for J. Jill and its peers, which have been stronger than most retailers, is showing some signs of weakness. Just look at Talbots. On Mar. 7, a troubling sales report from the conservative clothing retailer sent the stock sliding 15% over three weeks. Analysts say Talbots' sales fell as its upper-income clientele pulled back on discretionary spending.

NOT IMPRESSED. Markdowns, too, pressured results. "Right now, we're not doing any discounting," Cooke promises. Still, he admits that the apparel-retail environment is especially soft, and the company responded early last year with markdowns. For retailers like J. Jill, the key to keeping results strong is "careful management of inventory and minimization of markdowns," Klinefelter says.

For now, Wall Street isn't too excited about J. Jill since its market cap of $330 million is on the small side. However, if women like Karlin and Salkever are any indication, investors might want to browse the aisles at this up-and-coming retailer. Tsao covers the markets for BusinessWeek Online as a Street Wise columnist


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