My colleague Jeremy MacNealy has focused on J. Crew's
A few retailers have unique strengths that can provide a sustainable competitive advantage, but J. Crew is not one of them. Unlike Wal-Mart
J. Crew does not have the financial capacity to triumph in a state of heightened competition or reduced consumer spending. The company is more indebted than its rivals, and debt service makes a significant and ongoing claim on cash flows from operations. Interest payments appear manageable now that the business climate is so favorable. But leverage cuts both ways, and a downturn in sales would sharply reduce J. Crew's ability to invest in new stores and maintain high standards of quality.
The momentum of J. Crew's strong operating performance makes it unlikely that the retailer will stumble in the foreseeable future. But at an EV/EBITDA multiple of 17.9, the company's stock is priced for a perfection that has not yet been achieved. Any disappointment in J. Crew's operating results promises to cause a dramatic correction in the retailer's share price.
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