J. Crew (NYSE:JCG) released its third-quarter figures, and while the numbers were stellar, my Foolish colleague Michael Leibert offered caution over the company's current valuation. Investors can find further cautionary words from Alyce Lomax, particularly in regard to the hype that often accompanies an initial public offering. My colleagues raise some valid concerns, and any investor interested in J. Crew should pay close attention to them.
But I must admit that when I see the latest results from the apparel retailer, and the bulk of its 23% top-line growth coming from a whopping 19% increase in comparable same-store sales, I find myself becoming the bug that is drawn to the pretty blue light. Not heeding the advice of my colleagues, I may get zapped, but resistance seems to be futile -- my bug brain has a one-track mind to find out the source of that pretty blue glow emanating from J. Crew.
In this edition of Fool on Call, we will focus on the retailer's approach to growth, using J. Crew's latest conference call. More specifically, I want to highlight its strategy of getting "better faster" rather than "bigger faster." The discussion will take us to two parts of its business:
- Expansion strategy
- Store layout
On store growth
When doing the background research on J. Crew and going through recent press releases, I was struck by the level of attention the company gives to new store openings. "J. Crew by-the-sea Opens in Carmel Plaza" and "J. Crew and Walnut Creek . The Perfect Pair" were two headlines in particular that stood out for me. Furthermore, after going through the company's conference call in detail and seeing how management is clearly more concerned with squeezing every dollar out of existing stores than with simply opening new sites, I found that one company comes to mind that has utilized the very same business approach with great success: The Cheesecake Factory (NASDAQ:CAKE).
The Cheesecake Factory's growth strategy has historically been less reliant on high-speed unit growth, and more dependent on strong comparable same-store sales growth. As a result, its sales per square foot are toward the top of the class in the restaurant biz. With that kind of devotion to detail, no wonder Cheesecake Factory thinks it's a really big deal when it opens a new restaurant -- every new location is a cash factory.
Following in the footsteps of this successful restaurateur, J. Crew is willing to devote an entire press release to the opening of one store in San Francisco or Madison, Wis., because each new site means so much to the company. The fact that J. Crew achieved 23% net revenue growth, driven by a 19% increase in comps, reinforces management's methodology to get "better faster" as opposed to getting "bigger faster." Such were the words of CEO Mickey Drexler during the question-and-answer portion of the call, when responding to one analyst who was looking to see if J. Crew was planning to accelerate its square footage growth rate.
The company's priorities were clearly identified in Drexler's response to the analyst: "I would say, other than the product and the quality of the product, the most important metric that we're looking at now is productivity and efficiency in our existing stores." I love to hear that from management. Too often, concepts fall into the unit-growth trap, believing the best way to drive top-line growth is by accelerating new store openings. What often happens as a result is that the concept goes from having 100 or so mediocre stores, to having 500-plus that are even more mediocre because management didn't take the time to get it right the first time.
Drexler asserted that the company doesn't have to "plan any more aggressive [unit] growth" at this time. It doesn't have to because it has found that it can achieve healthy, strong growth simply by getting more out of existing stores.
Getting more out of existing stores
J. Crew's approach to better utilization of existing square footage is a bit different than that of Guess? (NYSE:GES), for instance, which uses a spacious store environment with fewer items to choose from. In a recent analysis of Pacific Sunwear (NASDAQ:PSUN), we found that PacSun is hoping that by reducing the clutter in stores, it will see its sales environment improve. Another retailer that I think could benefit from offering fewer items is Buckle (NYSE:BKE).
J. Crew, on the other hand, is thriving with stores "that feel crowded with goods." Instead of actually having a lot of excess inventory hanging around, the crowded feeling the company is going for is accomplished by altering the dynamics of the store layout. Drexler indicated that J. Crew customers are responding well to smaller stores that "feel more intimate."
The company has every shape and size of store, from 1,000 to 2,600 square feet all the way up to stores that can be as large as 5,000 to 7,000 square feet if the market is large enough. But on the whole, J. Crew is moving to smaller, specially tailored units that fit the image of the surrounding environment. Even those larger stores, like its Fifth Avenue store in New York City, are made to feel smaller and more intimate by lowering the ceiling height.
As well as noting that customers respond well to this format, Drexler also pointed out that the smaller stores require management to be smarter and more focused on inventory management. Better inventory management leads to fewer markdowns that negatively impact profit margins. During the Q&A portion of the call, management indicated that merchandise margins improved by 150 basis points as a direct result of selling more full-priced items.
Set sail with J. Crew?
Just because J. Crew is spending a great deal of time and energy in getting the most out of existing stores doesn't mean it won't be expanding. On the contrary, management indicated that it has a long-term target of roughly 9% square footage growth. With a long-term comps growth goal in the mid-single digits, the combined net sales growth in the mid-teens should lead to some solid returns for long-term-minded shareholders . assuming management continues to focus on quality growth.
This latter assumption is one we want to continue monitoring, as Drexler has been criticized in the past for his aggressive concept expansion with Gap (NYSE:GPS). But he is also a micromanager, by his own admission. He visits every new store prior to opening to make sure the site is where it needs to be to meet the high standards he has set at J. Crew, and this approach can greatly benefit the company as it establishes a solid foundation.
Can J. Crew and the management team remain focused on its current winning strategy of quality growth? Be vigilant in your research of this company, as you would for any investment -- we don't want to be the ones that get zapped.
Further fashion Foolishness:
Gap is both a Motley Fool Stock Advisor and a Motley Fool Inside Value recommendation. PacSun is a Stock Advisor selection, too.
Fool contributor Jeremy MacNealy has a player rating of 96.53 and is ranked 495th out of 14,228 participants in Motley Fool CAPS, the Fool's new stock-rating service that's open to everyone. He has no financial interest in any company mentioned. The Motley Fool has a disclosure policy.
