What J. Crew CEO Mickey Drexler Learned from Gap

In 1983, Gap (NYSE: GPS  ) was suffering. The company was churning out cheap, overdone clothing and the business was bumbling along.

CEO and founder Don Fisher decided to try some new ideas, and he reached out to Mickey Drexler, who had just overseen the turnaround of Ann Taylor. Fisher was hoping to get Drexler onboard for the launch of a new concept, but instead, Drexler floated the idea of a complete reimagining of the Gap brand. He joined the company as president and COO that year.

Twelve years later, the business was growing at a breakneck rate. In 1994, the company started to grow its store count by over 10% a year, and it didn't look back. But by the end of the '90s, Drexler's plan had run its course. The market was saturated with plain t-shirts and khaki pants and Gap began a 29-month sales slide that would end with Drexler's unceremonious exit..

Rounds of new management failed to bring back the old glory, and Gap's stock stuttered along at the $20 mark for a decade until its recent revival kicked in last year. Instead of licking his wounds in the corner, Drexler left with his head held high. He turned down a reported $2 million severance package because taking it would lock him into a non-compete agreement. Instead, he packed his bags and moved into J. Crew.

The J. Crew growth story
While Gap tried new marketing, new colors, and that weird thing where you wear seven t-shirts at once to get a layered effect, J. Crew reinvented itself in the image of Mickey Drexler. The company started signing deals with high-end designers and pushing its price points up. Drexler increased the brand's range, adding wedding attire and a children's line. It also added a new brand, Madewell, to appeal to the even higher end of fashion.

Drexler himself is renowned for ability to understand customers' needs and wants. Steve Jobs added Drexler to the Apple board in 1999, hoping that he could help the business understand how to make retail work. While Apple's success in stores owes its success to more than just Drexler's intervention, that he's still on the board speaks volumes about his quality.

At J. Crew, Drexler has more than tripled annual revenue since 2003 -- the company hit $2.2 billion last year. The success has meant that J. Crew is one of the few companies that has managed to thrive in 2013, as consumers pull back from spending on apparel. Gap has also been successful, but not where it competes with J. Crew.

Drexler's strength at J. Crew comes right out of his failings and successes at Gap. His vision led to the launch of Old Navy, which hit just as consumers were looking for cheaper alternatives, but his complacency about quality and innovation got him fired in the end.

At J. Crew, Drexler has opted for better fabrics and tighter quality controls. "Buy less if you love something but feel it's a risky item," he tells his buyers. "We don't want overstock." The attempt to reign in wilder flights of fancy is what has kept J. Crew looking like a line designed for young professionals, and it's helped the company take market share from Banana Republic.

The family feud
Over the last quarter, Banana Republic was the only one of Gap's three main brands that didn't see comparable sales growth over last year. The business dropped 1% while Old Navy and Gap both grew by 6%. In Gap's defense, no one is having the kind of success in 2013 that they saw in 2012. Banana may have dropped last quarter, but 2012's sales growth for the same period over 2011 was positive 6%.

J. Crew has at least managed to mitigate its damages. Over the same period, the company has grown comparable sales by 1% this year on top a 14% gain in 2012. The gap between the sales figures has pulled J. Crew within striking distance of Banana. Its $2.2 billion in annual revenue is now just shy of Banana's $2.8 billion. Considering that J. Crew has managed to get there with just over 300 stores while Banana Republic now has more than 600 locations drives home the point -- J. Crew is on a rampage.

Some analysts already have J. Crew as the dominant brand, with customer sentiment and overall mentions online favoring the company when compared to Banana Republic.

J. Crew is also benefiting from the second half of its management duo, Jenna Lyons. Lyons has been with the business for over 20 years, and she personally helped Drexler rebuild the company's line when he joined. Banana Republic just lost its creative head, Simon Kneen, who had recently given up much of the design duties to outside collaborators. The lack of a single vision put the brand at a clear disadvantage.

The future of J. Crew
J. Crew went public in 2006 and then private in 2011. With the recent success, investors are looking for ways to get in on the action. In an interview earlier this year, Drexler said that with the desire for private equity to see a return on its investment "[you] cannot not think about taking it public or other alternatives."

While the company is unlikely to return to the markets while consumer demand is putting so much pressure on the apparel sector, a few good quarters could be all it takes to convince the owners that the time is right. Until then, Banana Republic is going to have to focus on getting its house in order before J. Crew kicks it out on the street.

Change on the horizon
The success that Drexler has had over his career has come from his ability to understand what his customers want. In the same vein, his failure at Gap was a failure to connect with his core demographic. While products are a big part of the equation, customer interaction is becoming more and more important. Not every company has what it takes to meet the changing demands of customers, but three have stood out. You can read about these 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top brands is free for readers -- click here to read more.


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