June 23, 1999

J. Crew Group
770 Broadway
New York, NY 10003
Phone: 212-209-2500

by Yi-Hsin Chang (TMFPuck)

Ownership: Texas Pacific Group, Emily Cinader Woods
Competition: Gap, L.L. Bean, Lands' End
A Future IPO? "No immediate plans"
Popular women's and men's clothing, shoes, and accessories retailer J. Crew has a strong brand name comparable to retailing powerhouse the Gap (NYSE: GPS), plus high-quality, timeless products that readily garner customer loyalty. Primarily a mail-order catalog business, in its 15-year history J. Crew has put out more than half a billion catalogs featuring magazine-quality photographs of classic American-style clothing.

Many of the original items introduced by the New York-based company remain its core offerings and have been copied (the highest form of flattery) by its competitors. These include the rollneck sweater, weathered chino, barn jacket, and pocket tee. J. Crew products are distributed exclusively through more than 73 million catalogs per year, its 67 stores, 45 factory outlets, and its user-friendly website at jcrew.com.

Fort Worth, Texas-based investment firm Texas Pacific Group owns 85% of J. Crew, while Emily Cinader Woods, daughter of founder Arthur Cinader, owns the remaining 15%. Woods is the company's chairman and chief designer, while Mark Sarvary serves as its CEO.

J. Crew Q1 revenues increased an impressive 34.3% to $143 million from $106.5 million year-over-year. The company derives its revenues exclusively from the J. Crew brand, as it sold its Popular Club Plan and discontinued its catalog Clifford & Wills.

During the first quarter, retail store revenues increased 29% to $64.6 million, and comparable store sales rose 10.5%. Mail-order revenues for the quarter, which included online sales, gained 52% to $58.6 million, thanks largely to a 400% increase at jcrew.com, which saw sales go from $2 million to $10 million.

Last year, the J. Crew brand raked in $626 million in revenues -- 44% from its retail stores, 40% from catalogs and the Internet, 15% from its factory stores, and 1% from licensing revenues (its products are sold in Japan through 67 free-standing and shop-in-shop stores under a licensing agreement with Itochu Corp.). Over the last six years, the J. Crew brand has had annualized sales growth of 12%.

Like the Gap, all the clothes at J. Crew are created by an in-house design staff and made by third-party manufacturers in 30 countries -- 60% in Asia, 20% in the U.S., and 20% in Europe and elsewhere.

Get this, all J. Crew retail stores are profitable and have generated positive store contributions within the first 12 months of opening. J. Crew stores that were open during all of fiscal 1998 averaged $4.9 million per store in sales, produced sales per gross square foot of about $572, and generated store contribution margins of roughly 24% -- the numbers are among the highest in the industry. Gap, for example, averages about $532 in sales per square foot, while The Limited's (NYSE: LTD) chains average $312 per square foot.

J. Crew is in a highly competitive segment, taking on everyone from other catalog operations and specialty retailers to department stores and mass merchandisers, but its well-established name and look make it a formidable foe in the world of retailing.

I wish J. Crew were public because I love the company and I love their clothes. Of all the major apparel retailers out there including Gap and Abercrombie & Fitch (NYSE: ANF), I've spent more money at J. Crew -- in its stores, through its catalogs, and on its website -- than anywhere else. Why? Because they have great basic clothes and are always reliable in terms of quality. In fact, I often flip through the J. Crew catalogs just for fun.

Granted, the company has had problems with growth and with high executive turnover. But it has shed its non-core businesses and is focusing solidly on building the J. Crew brand. Its aggressive Internet strategy appears to be working and likely will contribute even more to top-line growth.

With Texas Pacific still holding 85% of the company, J. Crew looks to go public at some point, though the official stance is that it has "no immediate plans" at this time. Going public is just what J. Crew needs to move forward with a new infusion of cash and a higher profile for a company with an outstanding business model.

Next -- Levi Strauss

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