J. Crew Ponders a Possible IPO

Will J. Crew become the next hot retail stock?

Mar 15, 2014 at 7:00AM

If you're a retail investor, you may soon be able to buy a piece of J. Crew Group. The company, currently owned by TPG Capital and Leonard Green & Partners LP, is talks with several banks about a potential IPO later this year. The retailer has 451 stores and about $2.4 billion in annual sales, and those close to the matter told Bloomberg that the company may be worth as much as $5 billion. The current owners paid $2.64 billion for the company when they purchased it three years ago. Company reps have not publicly commented on the matter.

When J. Crew's current owners bought out the company in November 2010 they agreed to pay $43.50 per share. There was talk among shareholders that the price paid for the company was low and investors sued over the claim that J. Crew executives didn't do enough to gain higher bids. The company ended up settling the lawsuit for $16 million plus $6.5 million in legal fees.

J. Crew is currently busy expanding its retail base in places like London and Hong Kong. The company's preliminary results for 2013 showed that revenue increased 9% to $2.43 billion for fiscal 2013, which ended Feb. 1. EBITDA is estimated to range between $369 million and $371 million, up from $360 million in 2012. The company's cash balance more than doubled during this period, while its long-term debt decreased by almost 1%.

Retailers that have gone public recently and performed well
The retail sector has performed well as of late -- the Standard & Poor's Retail Select Index surpassed the S&P 500 Index over the last 12 months as these indexes returned 27% and 24%, respectively. The increase came despite Commerce Department figures that showed lower sales at U.S. stores in January and the steepest decline since June 2012. Also, retailers that launched IPOs late last year have rewarded their investors handsomely.

Vince Holding Corp. (NYSE:VNCE), which also sells men's and women's apparel but is considered a bit higher-end than J. Crew, has gained 33% since its November 2013 debut. The Vince brand is carried in over 2,100 stores across 43 countries; the company also has 21 retail locations, six outlet stores, and an e-commerce site, Vince.com. The company closed its IPO in November 2013 with 10 million shares of common stock valued at $20 per share, and its shares currently trade near $26. Long-term targets include total net sales growth of 15% to 20% and net income growth of 20% to 25%.

Fourth quarter and fiscal 2013 sales for Vince showed double-digit growth in its wholesale and direct-to-consumer businesses. Vince attributed the wholesale growth to strong U.S. department store performance, increased presence in international markets, and higher licensing fees related to the women's shoe line. The company attributed the direct-to-consumer growth to the openings of six new stores and continued strength in e-commerce. Total net sales for the year grew almost 20% to $288 million and comparable-store sales were up 21%. Full results will be reported in late March.

Specialty retailer The Container Store Group (NYSE:TCM) went public in October 2013 for $18 per share and its shares have risen over 85% since then. For the year-to-date period which ended on November 30, 2013, net sales were up almost 9% and comp-store sales increased 3.6%. While the net loss widened through November 2013 because of a high increase in stock-based compensation costs, the diluted loss per share decreased considerably to $(8.78) from $(23.08) in 2012. Gross margin also rose 30 basis points over the 2012 period to 59%. SG&A expenses also rose by almost 9%, mostly due to IPO-related costs .

Last but not least -- one of the great retail success stories of the past two years has been Michael Kors Holdings (NYSE:KORS), which recently reported its 31st consecutive quarter of growth. The company went public in December 2011 with an initial price of $20 and its shares have traded as high as $101. During the third quarter, revenue rose 59% and comp store sales increased 27%. For the 2014 fiscal period which ends in March, the company estimates diluted EPS will range between $3.07 to $3.09. The market expects Kors to earn $3.12 per share and post revenues of $3.21 billion, which represents about 47% growth in sales.

So far, this luxury lifestyle brand shows no signs of slowing down. In a move similar to that of Vince, Michael Kors is launching a revamped website that enhances the customer's buying experience and interaction with the brand. The company is also looking to expand further in Europe and tap into the Chinese market and its middle-class aspirations.

Foolish conclusion
Besides going public, J. Crew could also be bought by an apparel store operator such as Fast Retailing, a Japanese retailer that's eager to aggressively expand into the U.S. market and beyond. Some analysts believe the $5 billion valuation is too high a price tag, while others in the market favor the company going public. If it follows the coattails of some of its competitors that went public, J. Crew's value could rise considerably given its strong brand and retail presence, which would make it an attractive investment.

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Eileen Rojas has no position in any stocks mentioned. The Motley Fool recommends Michael Kors Holdings. The Motley Fool owns shares of Michael Kors Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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