I've never been a frequent J. Crew customer, but I have a few friends who are big fans. So I couldn't resist a bit of curiosity upon hearing rumors in May that the company planned an IPO later this year. Yesterday, those rumors shifted closer to reality when the company filed to go public on the NYSE under the proposed ticker symbol JCG.
To some, J. Crew is on the pricier end of the mall-based retailer spectrum. But it's also a trusted name that has historically filled its stores with customers snapping up the goods. Should investors roll out the red carpet for this IPO debutante's coming out?
A walk down memory lane
Let's start with some J. Crew history -- and skip past the obvious stuff. Yes, the clothes pack a hefty price tag. Yes, they've got that "preppy" look. (According to the company, its clothing is actually "classic.")
J. Crew started in 1983 as a retailer that peddled its wares solely via catalogs. It opened its very first store in 1989 in New York City, and now boasts just shy of 200 stores. Indeed, last year, the company generated nearly three times more revenue from its retail stores than from its catalog and Internet channels.
Other companies that followed the same path from catalogs to bricks-and-mortar locations include Coldwater Creek
The Gap connection
Interestingly, J. Crew's chairman and CEO is Millard (Mickey) Drexler, who led Gap
Drexler shifted from Gap to J. Crew in 2003. As luck would have it, he brought a lot of former Gapsters with him. Four members of Gap's management team defected, while several more came from other clothing hot spots like Limited
Knowing management's spend-happy history might give investors a chill, and it brings up a logical question: Is J. Crew up to its ears in debt? Well, yes -- but it was already on the balance sheet when Drexler came on board.
J. Crew's S-1 filing included a blurb in its risk factors about officers and directors' substantial amount of stock ownership (the exact percentage has not yet been disclosed). While that does limit shareholders' voice in the company's operations, we Fools tend to prefer businesses where management has a vested interest in the stock performance.
Trying on the numbers
A quick check of J. Crew's first-quarter press release (these numbers are also released in the S-1 registration statement) shows some heartening signs. Net income came in at $5 million, compared with a net loss of $24 million this time last year. Same-store sales increased a whopping 37%, while consolidated revenues increased 45% to $211 million. Of course, same-store sales can indeed sound astonishing when a company is up against an easy comparison to last year, and that's definitely the case here -- comps increased a mere 4% during the same quarter last year.
The financials also reveal that aforementioned long-term debt -- $590 million, as of the first quarter. J. Crew has 24 more times more debt than its mere $25 million in cash. Indeed, the company's risk factors in its annual SEC filing specifically contain the following warning: "We may be substantially more leveraged than certain of our competitors, which may place us at a competitive disadvantage." In its filing, the company said that paying off some of its debt is its primary reason for going public.
J. Crew hasn't had a profitable year since its flush 2001, which has become the benchmark for many of the metrics we've shared here. Although revenues for the most recent fiscal year increased 17% to $804 million, that still hasn't matched 2001's $826 million in sales.
Needless to say, J. Crew's earnings power has been hindered by its large debt load. That's why the company's fourth-quarter refinancing makes sense, even if it resulted in a huge $50 million prepayment fee. On the other hand, being allowed to refinance its debt shows that the company's on the mend -- its means lending institutions have more confidence in J. Crew. The company said the refinancing will save it $16 million in interest expense this year.
In another bright spot, J. Crew has obviously learned how to squeeze profitability out of its numbers. Selling, general, and administrative (or SG&A) expenses have shown a steady downward trend since 2001, with a slight uptick this past year.
In addition, J. Crew is free-cash-flow positive in a big way. Its free cash flow ended the company's most recent fiscal year at $48 million, up 330%. The company uses its capital expenditures to open new stores, provide working capital, make system enhancements, and pay debt service requirements. Although capital expenditures in the first quarter were a mere $4 million, the company plans to spend $25 million in fiscal 2005 to open 10 new stores and implement information technology initiatives.
What's in store?
If you're taking an in-depth look at the publicly available information about J. Crew, you might see that over the course of the last three years, its number of retail stores has remained around 197. It's certainly not using debt to expand, at least for the last couple years. J. Crew cited a poor economic environment, and some merchandise missteps over several difficult years, to explain why it curtailed new store openings. However, the company clearly needs to open new stores to fuel future growth, especially since its bricks-and-mortar retail sales have overtaken its catalog and Internet business.
My curiosity was piqued by word of the possible IPO, so I recently visited a J. Crew store -- and found that it looked much different than stores I'd seen in the past. The lion's share of customers seemed to be huddled in the back by the summer clearance racks, and while the full-price clothes in the front of the store struck me as expensive, I can't say they looked extremely compelling.
I recently asked an especially fashionable friend and J. Crew fan (yes, that's you, Liz) her opinion on the store's wares, and she replied that its prices seem to outpace the quality of its clothes. She cited another mutual friend of ours who actually called the company to tell them to stop sending her catalogs. When the customer service rep asked her why, she said the prices were too high. The response was something along the lines of, "Yeah, I know." My friend Liz sees herself shopping at J. Crew outlets and sales in the future, given the steep price tags.
If J. Crew does ultimately go public (and since IPO filings are rarely withdrawn, it probably will), should investors sign on? The IPO price will likely be an essential element of the decision. The pricey, preppy clothes at J. Crew may be tempting for many people, but if and when the company goes public, I'd have to seriously ponder whether its few promising signs made the stock worth trying on.
We're ringing up further Foolishness:
- One Fashionable Stock, by Nathan Parmelee
- Fast Retailing's Moving In, by Nathan Parmelee
- Fools Seth Jayson and Rick Munarriz duel over Abercrombie.