J. Crew (NYSE:JCG) released its first catalog in 1983, so it's not exactly new to the fashion scene. But it wasn't until Millard "Mickey" Drexler took over the helm in January 2003 that the company set itself on a path that would eventually result in its going public in June 2006.
Drexler brings ample experience to the table. He has been on the board of directors at Apple Computer and the CEO of Gap (NYSE:GPS). He has taken heat for being one of the reasons for some of Gap's recent shortcomings, but what critics fail to mention is that Drexler is also one of the main reasons why Gap became a household name in youth apparel in the first place.
I can't say J. Crew's preppy fashion style is one that I find particularly appealing, as the edgier looks of Guess? (NYSE:GES) and Abercrombie & Fitch's (NYSE:ANF) REUHL are more to my liking. Although it's unlikely you'll find me shopping at a J. Crew, I'm not shying away from J. Crew as a potential investment. There are more positives to J. Crew for long-term-minded shareholders than there are potential pitfalls.
On its stores
In a recent analysis of J. Crew, I highlighted one of the qualities I found attractive about the retailer: its focus on getting "better, faster" as opposed to getting "bigger, faster." One area in which this becomes vividly apparent is with the performance of its stores.
In J. Crew's latest quarterly results, its top line increased solidly by 23%, with same-store sales increasing a whopping 19%. Fueling its comps growth was the company's focus on store productivity and efficiency. Sales per square foot increased 15% to $510 for the trailing 12-month period ending in the third quarter, up from $445 over the same period last year. This is ample evidence that Drexler's strategy to squeeze every last dollar out of existing square footage is working.
The importance of this strategy cannot be overemphasized. One of the best examples I can offer of a retailer that did not take the time to first get the stores and merchandising right before embarking on an aggressive expansion plan is Hot Topic (NASDAQ:HOTT). Now here's a defunct retailer that currently has roughly 700 Hot Topic brand stores in operation, which is more than double its store count from 2001. Yet we find that its stock is sitting at the same level it was five years ago. Its stock has been a laggard because management failed to get better before getting bigger.
The great news is that J. Crew still has ample store growth opportunities ahead of it, considering there are only 176 retail stores and 51 outlet stores in operation as of its latest quarterly report. The company has focused on getting better, faster -- making for a powerful combination when it chooses to get bigger, faster.
On filling niches
One of the criticisms directed toward Drexler during his later years at Gap is that the retailer began aggressively expanding its brands while losing focus on its core audience. We might fault Gap for losing the "coolness" edge over rising star Abercrombie & Fitch, but I find the critique of brand expansion a faulty one.
Looking at Gap's most recent results, it was in fact some of these other brands that carried the load for the parent company, averting a worse quarter than it would have had otherwise without brands like Banana Republic and Gap Kids on board. Gap identified important niches that needed to be filled, and like Limited Brands (NYSE:LTD) has done with great success, developed brands to meet consumer demands. Not surprisingly, Abercrombie & Fitch has modeled much of its brand expansion on Gap, using Hollister to compete with Old Navy and REUHL to compete for the upper end of the market against Banana Republic.
Still, today, Drexler sees important niches that need to be filled, and he is intent on using J. Crew to meet the demand. Crew Cuts, which tailors high-end apparel for children ages 2 to 8, is one such brand development that I think will increasingly play an important role for the company. Drexler had this to say on its latest brand: "We're very pleased with the reaction to Crew Cuts, which fills the niche in the market where there has been, in our opinion, a void for better quality boys and girls apparel."
Crew Cuts currently operates in-store within 12 J. Crew stores. Plans are under way to open up an additional 10 to 20 Crew Cuts in existing shops and to unveil one or two stand-alone sites. Further, the new brand is being expanded to reach children up to 10 years of age.
J. Crew for you?
J. Crew has established a long-term annual target of roughly 9% square footage growth and mid-single-digit comps growth. This estimated top-line increase in the mid-teens should trickle down to even greater EPS growth, since retailers are generally able to leverage SG&A expense, resulting in improving profit margins.
In a nutshell, what this means is that for long-term-minded shareholders, there are plenty of positives that make J. Crew an attractive investment in the apparel industry.
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Fool contributor Jeremy MacNealy has no financial interest in any company mentioned. The Motley Fool has a disclosure policy.
