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J. Crew: A Smart Outfit?

The current economic climate in the U.S. is a sore spot for retailers, forcing many to make tough business decisions. In the face of this challenge, J. Crew (NYSE: JCG  ) seems set on some serious strategizing this year.

J. Crew has it made?
According to The Associated Press, J. Crew CFO Jim Scully spoke about the company's nascent Madewell concept at the Wachovia Nantucket Equity Conference. The retailer will reach a "'go or no go' decision" on Madewell in the second half of this year, and Scully vowed that the concept won't lose $15 million a year going forward. (That's the amount J. Crew will lose in fiscal 2008 as it invests in Madewell stores and its new e-commerce site.) If it's a "go," Scully said, a ramp-up of Madewell wouldn't occur until 2010, given real estate issues.

Madewell was launched in 2006, and it's thus far had a conservative rollout, remaining firmly in R&D territory. According to last quarter's J. Crew conference call, it caters to hip younger women, although some teens shop there, too.  

There were eight total Madewell stores last quarter, and J. Crew plans two new ones in 2008. Madewell offers lower price points than its J. Crew concept, which might spell trouble for companies like Gap (NYSE: GPS  ) , Abercrombie & Fitch (NYSE: ANF  ) , and American Eagle Outfitters (NYSE: AEO  ) if J. Crew pursues an expansion. The new e-commerce site could theoretically threaten rivals, too, since its reach extends beyond a mere geographical footprint.

Some rivals may hope Madewell's growth will be a "no go," but I doubt they'll be so lucky. After all, last quarter J. Crew said it was pleased with the concept's performance. Management also mentioned that it's particularly happy with Madewell's performance in the $100 jeans business, even though that hardly seems like an ideal pursuit at present.

In other news, J. Crew's expanding its yoga apparel -- possibly bad news for lululemon athletica (Nasdaq: LULU  ) , prAna (which Liz Claiborne (NYSE: LIZ  ) decided to sell several months ago), and VF's (NYSE: VFC  ) Lucy -- and testing jewelry.

Lookin' good, J. Crew
When it first went public, I thought J. Crew stock was too pricey for my blood. However, it dropped 20% on the day it reported first-quarter earnings, and it's fallen 33% over the last 12 months. Perhaps J. Crew stores' limitation to the currently moribund U.S. market, at a time when international exposure is most retailers' sole bright spot, may explain the company's sagging shares.

Worse yet, even with its stock's drubbing, J. Crew's still trading at 20 times earnings. Compared to the price-to-earnings ratios of retail stocks like Gap and American Eagle, investors may find that a reason to balk.

Then again, J. Crew is a high-quality retailer, and investors should not underestimate its managers' potential to unleash innovations. After all, former Gap wunderkind Millard "Mickey" Drexler, renowned for his fashion savvy, is currently at the helm, and it's entirely possible he's learned his lesson after overseeing Gap's ill-fated overexpansion back in the '90s.

Hardcore value investors may scoff that J. Crew remains too pricey, but at the very least, I suspect it's a good time to put this growth-oriented retail stock on your Foolish watch list.

American Eagle Outfitters and Gap are Motley Fool Stock Advisor recommendations. Gap is a Motley Fool Inside Value pick. VF is an Income Investor selection.

Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares in American Eagle Outfitters. The Fool has a sharp-looking disclosure policy.

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