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MICKEY’S MAGIC

Former Gap CEO Drexler promises shakeup at J. Crew

BY JON SPRINGER

It was 1983 — 20 years ago — that the J. Crew catalog first started appearing in U.S. mailboxes. Over the 15 years following, J. Crew became one of the fashion retail industry’s biggest success stories, growing a multichannel operation (including mail order, Internet, and retail and outlet stores) valued at $1 billion overall. The company’s upscale casual apparel for men and women spoke to a niche lifestyle known as “preppy.” And J. Crew was the powerhouse brand that defined it.

Then it all unraveled. There was even concern as recently as this year over whether the brand would reach its 21st birthday. But things could be looking up for the retailer again. In a bold move that some see as its last and best chance for survival, J. Crew hired former Gap architect Millard S. “Mickey” Drexler to take control. Drexler, known as the “Merchant Prince” for his work building Gap, was named chairman and CEO in January of the beleaguered chain, into which he invested $10 million of his own money.

So what ails J. Crew? Drexler doesn’t mince words. “Anything and everything is under attack,” he said in a conference call with investors and analysts this spring, including stores that “looked like every other category player in the mall.” The catalog that made the chain famous was “a junk book,” while much of the apparel it sold “talked down to the customer.”

Drexler’s turnaround plan involves harnessing J. Crew’s assets: a strong brand name, its reputation for innovation and creativity, 157 retail stores (mainly in upscale malls), 43 outlet stores and a powerful mailing list. He says he plans to fill those stores with merchandise and merchandising that speaks more directly to J. Crew’s classic, upscale image — which will mean better raw materials and, ultimately, higher-priced goods. But that will be balanced, he says, by an emphasis on better customer service and a revitalized brand that could eventually grow into a chain of up to 300 stores.

“We basically have no choice,” Drexler told investors. “If we continued along this path, I don’t think we’d have any chance.”

J. Crew has struggled financially in recent years, with its revenues falling 7.2 percent from $826 million in 2001 to $766.4 million in 2002. Profits were down 22.1 percent over the same period. The company’s first-quarter 2003 sales report, released in late May, showed that same-store sales were down 11 percent versus the comparable quarter in 2002, while revenues fell 3 percent. J. Crew stores overall were doing about $365 per square foot, the company said in March.

Aside from its conference calls, J. Crew is saying little to the press about the specific ways Drexler will approach the chain’s difficulties. But he and his new executive team, which includes Jeff Pfeifle, the former Old Navy chief, as president, say their efforts will focus on a number of problems that had gradually brought the brand to the brink of crisis:

• Though J. Crew’s retail business sprung from a hugely successful catalog, the stores haven’t managed to translate the style and scenery that has sold so well in print. The catalog, meanwhile, has suffered its own quality erosion, leaving stores with even less to draw from. “The catalog had been totally downgraded,” Drexler said. “It lost that ‘magazine’ quality that made it so successful.”

• After Texas Pacific Group bought the company in 1997, a number of executives came and went, contributing to an overall loss of focus, poor communication between departments and channels, and a great exodus of designers and other key creative people. (Drexler is J. Crew’s fourth CEO in five years.)

• Pressure from moderately priced competitors in an overstored market has led to a decline of J. Crew product quality in terms of both make and fit, while customer base and product lines have skewed younger than the company would like. “We do not want to play in the moderate market, nor should we,” Drexler said.

Only a few of the Drexler team’s changes are visible now, but they will get clearer as the year goes on. The spring 2004 merchandise will be the first to bear Drexler’s stamp from beginning to end. The team has already pulled some merchandise considered brand-inappropriate from stores and started replacing it with better-quality items in August. Store window displays, Drexler said, have changed to “be more reflective of who we are.”

Drexler hopes to bring better service and merchandise to J. Crew.

All this is a move in the right direction, says Dawn Stoner, an analyst who follows the retailing industry for Pacific Growth Equities, San Francisco. The plan to increase prices, product quality and the target demographic makes sense, she says, not only because it is appropriate for the brand, but also because competition in that segment is lighter.

“That [25-to-35 age] group has been off the radar recently,” Stoner said. “Many companies have gone after the teen customer, chasing the good demographic trends and growth there, and others are chasing the baby boomers, who have disposable income and strong willingness to spend on apparel. It’s that Gen-X customer that falls in the middle that has been overlooked by most companies.”

According to Stoner, J. Crew’s competitors will be Banana Republic and Ann Taylor Loft as well as two new concepts, Urban Outfitter’s Anthropologie and Chico’s Pazo. “Anthropologie has done an excellent job and has often talked about a lack of competition there,” Stoner said. “J. Crew is a brand that’s well-suited to perform in that demographic. And it behooves them to get out of the way of the teen chains.”

Whether the chain can deliver apparel that shoppers want is another story. Drexler noted this spring that the chain was carrying only about “20 percent of the right product.” Such J. Crew staples as the roll-neck sweater will make its way back into stores, he added. What the chain brings into its stores will make the difference, says Kurt Barnard, president of Barnard’s Retail Consulting Group, Upper Montclair, N.J.

“J. Crew has had a run of fashions that were not sufficiently persuasive to a sufficiently large number of consumers,” Barnard said. “That’s essentially been [the problem]. What it needs is to be a little closer in touch with what the consumer wants. J. Crew is a good name, and if it came through with some irresistible fashion, it could come through again.”

Drexler says J. Crew’s customers would be willing to pay more for quality, despite the shaky economy, if they felt they were getting value in areas like customer service and fit. “Customers have told us they want better quality — they’re demanding better quality,” he said. “They are tired of the apparel market talking down to them.”

As J. Crew attempts a comeback, its real estate can be an asset, observers say. The chain is generally in the right places, Stoner says, and has room to grow if and when it takes off again.

“They have always targeted ‘A’ and ‘A-plus’ malls which would be a good fit for a more upscale interpretation of the brand,” Stoner said. Though J. Crew’s largest store is its 13,000-square-foot Rockefeller Center flagship in New York City, most of its units are smaller than 7,000 square feet. “They may also look to off-mall locations, because it seems that the older consumer doesn’t go to the mall as often as they used to and want downtown locations where they live and work.”

Randy Brant, senior vice president of The Macerich Co., Santa Monica, says he feels that the J. Crew stores in his company’s portfolio can and will rebound. “I’m not only a landlord of J. Crew, but a customer, and I’ve always liked their concept,” he said. “It’s got a niche as a unisex retailer falling between the Banana [Republic] and the traditional men’s store.”

But perhaps the biggest thing J. Crew has in its favor is its new CEO, Brant notes. Gap was specialty retailing’s biggest success story for some 20 years, its more recent struggles notwithstanding. “We have great respect for Mickey Drexler, and we believe he’s got what it takes to get J. Crew back on its feet,” said Brant.

Barnard agrees. “Drexler will always have to his credit that he engineered The Gap into what it became: the emporium of blue jeans, blue shirts and khakis,” he said. “The fashions he created evoked the freedom of the Wild West and the fashion almost everybody on Main Street U.S.A. and Wall Street U.S.A wanted to identify with. That will always be to his credit.”

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