J.Crew Turns Around and Heads into an IPO

Jun 28, 2006

By Rick Moss

In what is expected to be the biggest retail IPO since 2002 when Petco went public, J.Crew is preparing to hit the NYSE big board under the ticker symbol JCG. The 215-store
clothing retailer that began life as a catalog in 1983 plans to offer 18.8 million shares in the $15 to $17 range, which would yield about $280 million in new proceeds and give
it a proposed market value of close to $1 billion.

The timing seems just right for a successful IPO event. J.Crew is coming off a good 3-year run thanks in large part to the leadership of former Gap CEO Millard Drexler. Analysts
credit the turnaround to a number of improvements: reconfirming its “preppy” image, improving store designs, and broadening assortments. The management team has also gotten high
marks for closing underperforming stores and adopting a more conservative expansion strategy. It’s all led to eight consecutive quarters of same-store-sales growth. In fact, in
the most recent quarter, J.Crew reported a 60 percent pop in first-quarter profit along with double-digit sales gains.

Despite a more measured approach, the chain is by no means hesitant about pushing out in a number of directions. Currently operating 167 retail stores and 48 factory outlets,
in the next few years J.Crew plans to open as many as 35 new locations annually. There are new formats as well: Madewell, focusing on casual women’s fashions, and Crewcuts for
kids. And of course, there’s the well-regarded jcrew.com to round out the company’s well-orchestrated, multichannel strategy.

In commentary published on MarketWatch.com, Renaissance Capital is generally bullish on the new stock. “It has a lot to prove, but J. Crew enjoys a strong brand name,
and we believe investors will give its savvy management team credit for its execution thus far.”

“Despite the recent sell-off in the market, most of J. Crew’s publicly traded retail peers have held up, and given its fair valuation based on its proposed expansion plans, we
believe there will be a decent amount of interest in the deal,” concludes the analyst.

Moderator’s Comment: Assuming J.Crew’s IPO is a success, will other chains, that have been sitting on the sidelines, take heart and make their move?
How will J.Crew use the new capital to its advantage and, conversely, what dangers could befall a “hot” chain like this?

J.Crew had one advantage from the start when it expanded into brick and mortar retail. From its genesis in catalog retailing, its marketers worked the power
of the photograph and, in a sense, good storytelling. Each catalog was another episode in the lives of rich, breezy, carefree people; lounging, splashing and sporting around in
their comfortably broken-in preppy togs. As long as J.Crew perpetuated that storyline – in their advertising, merchandising and product mix – they stayed on track.

Clearly, this current management team gets it and we hope the monetary injection won’t introduce plot-spoiling characters and pressures.
Rick Moss – Moderator

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5 Comments on "J.Crew Turns Around and Heads into an IPO"

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Kai Clarke
15 years 10 months ago

I like many of the comments from my BrainTrust peers, however there are several unknowns which must be emphasized. The first is that we are in the midst of summer, and in a market which has been moving sideways after a major pullback. We don’t know where the market is going, and introducing a major IPO into these conditions might not be the best time. Waiting until fall might mean a better payout and a more robust offering price (and the ability to sustain this pricing in the share price). However, this is a strong company with good fundamentals, and they may weather this storm quite well. The only thing which we can determine is that the price will certainly get a lot of attention as it grows during the first day, and then starts to level-off or pull-back. Good luck to J.Crew and we all hope that their IPO is robust and sustainable!

Rick Moss
15 years 10 months ago

Editor’s note: So far; so good. In its first day of trading, J.Crew’s shares rose almost 30 percent. Offered at $20, it opened at $25.05 and rose to $25.67 by end of day on heavy volume (22.4 million).

Ian Percy
15 years 10 months ago
This is not so much a comment on J.Crew as it is about retail chains considering an IPO. One of our Profitable Transformations Network team members, David Thomson, has recently published the only quantitative research on exponential revenue growth in a book titled “Blueprint to a Billion.” You can get it anywhere and I strongly encourage it – even if you just want exponential revenue growth without the IPO. This research is getting a lot of attention from Wall Street. David studied every IPO in the US since 1980 – well over 8,000 of them. Then he isolated those that hit a minimum of a billion dollars in revenue (only 5% of the list) and analyzed them in even greater depth. What he found were “7 Essentials” or key variables that distinguished the billion dollar companies from all the others. To cut to the bottom line, your chances of a hugely successful IPO fueled by exponential revenue growth are significantly enhanced if your company has all seven characteristics. We’re talking about your company joining the… Read more »
Don Delzell
Don Delzell
15 years 10 months ago

Rick hit it on the head. J.Crew established a lifestyle brand. Lifestyle brands have much longer legs than trendy ones. And, if the lifestyle is associated with a large enough section of the population, you can even build a successful retail chain. Like any lifestyle brand, this one will have a limit. The limit is defined when the segment of the consumer population which aligns with the lifestyle statement is saturated.

When evaluating the potential for other chains to follow in J Crew’s IPO steps (going beyond standard business analysis), ask if it’s a trend operator, or a lifestyle brand. If it’s a lifestyle brand, ask how large the group is which identifies with that lifestyle. Then ask how dynamic the expression of lifestyle values is for that group. The more dynamic, the less chance there is of long term success. Preppy is about as stagnant a lifestyle expression as it’s possible to get. However, Preppy also has a relatively quickly reached population segment limit.

Mark Lilien
15 years 10 months ago

Investors love same-store sales growth. Anytime a retailer can demonstrate consistent comp sales increases, their stock becomes more valuable. Furthermore, J.Crew’s number of locations hasn’t yet saturated America. If the saturation point is 600 locations, they can safely double the size of the company. Mr. Drexler is doing a great job, and investors appreciate well-known veteran leaders.


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