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Taking a Deeper Look at Madewell

By Motley Fool Staff - Oct 14, 2019 at 5:30PM

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The jeans company is being spun off from J. Crew.

J. Crew has struggled, but its jeans brand Madewell has been steadily growing. The company posted over 30% growth in 2018, and consumers have responded well to its sustainable fashion model.

On this episode of Industry Focus: Consumer Goods Motley Fool contributor Daniel Kline joins host Dylan Lewis to break down how the company has built its loyalty model and its focus on e-commerce. They also discuss how the company has built out its very selective retail presence.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Oct. 8, 2019.

Dylan Lewis: Yeah. To put some numbers to the brand, we have these breakouts thanks to their filing with the SEC. Revenue for Madewell was just over $600 million for their most recently completed fiscal year, which is up 32% year over year. In the prior year, they'd grown revenue at 27% year over year. So there's some accelerating growth there. I think some of that is the fact that, yes, the clothing looks good. As a brand goes, they're an inclusive brand. You see diverse models, you see them accommodating people of all different shapes, which is awesome. And they're very focused on sustainable fashion, which I think has become very in vogue in response to so much of the fast fashion that we've seen over the last decade or so.

Dan Kline: They're also focused on sustaining their user base. I think this is a digital lesson to be learned. 60% of their customers are in a loyalty program. That's really important for driving repeat sales. Let's say you put a model out. AT $150, maybe it doesn't sell as well as you would have hoped. Well, you have 60% of your customer base that you can go to them and say, "Oh, my God, these new $150 jeans, we'll give them to you for $99." That's a way to prevent failure, move inventory, stay relevant, stay in touch, make people feel a little bit special by offering them some deals, or maybe some product early, and being connected to your user base in a way that's much better than hoping they walk by you in the mall and remember, especially for a brand that only has 130 or so stores.

Lewis: Yeah, I've been really impressed with how e-commerce-oriented this business is. I think it's really an indication of where the industry is going and some of the best practices that a lot of other retailers should be adopting. You mentioned just over a third of their sales coming via e-commerce. I'm actually seeing a lot of articles about their organic search strategy, their ability to bring customers to their website for e-commerce transactions, on things that are not branded terms. A branded term, in SEO parlance, would be someone being like, "I'm searching specifically for Madewell jeans." What we are noticing with them, people that are mining the data here, is that people just searching for jeans, or just searching for a type of skirt, are coming to their site, which shows not only are they winning when it comes to getting mindshare, but they're winning in terms of their e-commerce strategy as well.

Kline: Yeah. Also, think about terms like "jeans that fit." When you're making a jeans company that's very focused on being inclusive and body positive, that makes it a lot easier for someone to come in. I know my wife who's skinny struggles with finding jeans. It's just the way sizes work. It's not an easy thing. If you have a company that's embracing that, which Madewell is, it makes it easier for you to be willing to go there. If it's a digital sale, and they've got all the returns set up really well, that's also something that's very important. Because a lot of the traditional retailers, if you order pants online -- I'm wary about doing that -- and they show up and they don't fit, it's a hassle to return. Companies that are digital native like Madewell, that's baked into the process. It's very, very simple to try clothes on, find the right fit, and figure out exactly what you want, and then reorder. You might go to a store once and then have a digital relationship going forward. That's something the company has embraced along with this, "Hey, we're going to figure out how to find pants that fit you."

Lewis: Dan, you mentioned the retail footprint. I think just over 130 Madewell stores right now. One of the growth levers for this business is going to be them continuing to open stores. We've seen pretty good numbers when it comes to comps for them. I think around 10% for some of the recent quarters. But they've laid out that they want to open 10 to 15 fairly large stores, mostly in some pretty prime areas, over the next couple of years.

Kline: They're 3,000-square-foot stores. It's a pretty typical mall clothing store. But they're looking at what's happening. I think it's fair to say that with malls, there are going to be winners and losers. The top-tier malls that are attracting all these digital native brands, that still have anchor stores that are doing well, that are replacing failed stores with gyms or hotels, those are going to be the malls you want to go in, the ones where the customer with more money to spend is going to come to. Madewell's in a really good position. Even successful malls are having trouble. Chains like Forever 21 going bankrupt are creating huge holes in malls. It gives a company that could pick, and they could say: "Look, we're going to come to somewhere in South Florida. That could be West Palm Beach, it could be Palm Beach Gardens, it could be Miami, it could be Boca. And play the five or six malls in those regions against each other to get either better terms or shorter-term deals." This gives them a lot of leeway. They don't have to be in every mall. They can do what Peloton is doing, and just pick the right place to be, where their customers are, where it's a little bit of like, "Oh, wow, that's the mall that has a Madewell?" I think that's a very strong brand positioning piece. You want to feel special. You want to feel exclusive. You don't want this to be an everywhere brand.

Lewis: Yeah. For people that have not seen their retail footprint, and haven't come across one of their stores yet, you can think about their store placement very similarly to how Warby Parker chooses their locations. If you look over in Washington, D.C., I pass the Madewell on 14th Street in northwest D.C. all the time. That is only a couple of blocks from the Warby Parker that's over in Shaw. Both of these are scene type of places. There are a lot of bars, there are a lot of places where people go get cocktails, nice coffees, there's a lot of those boutique-style gyms. They are putting themselves in pretty prime real estate with most of the locations they're in.

Kline: Yeah, prime locations, and places where it's an event, it's something to do. Warby Parker has the problem of, it's a little bit awkward to get five pairs of glasses in the mail and then try to figure out which ones work. It's really something that having a retail footprint helps. I know. I tried 15 different pairs before going to LensCrafters and buying glasses. In this case, with people being more and more comfortable buying clothes online, and in general, you're probably not changing sizes all that often -- let's hope not -- that a very select footprint is going to lead to creating that relationship, and then the ability to maybe check in once a year. I know that if I needed jeans, and perhaps I should buy some new jeans, I would think about going out of my way to find a Madewell, get my sizing down, work with someone, figure out what I need, and then as time goes on, if I want to order more, or there's a style I like or something, perhaps I would then do a digital sale.

Daniel B. Kline has no position in any of the stocks mentioned. Dylan Lewis has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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