J. Crew Group (JCG)

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J. Crew (NYSE: JCG) sells men's, women's and children's apparel and accessories through North American retail locations as well as catalogs and its website. JCG produces products with a traditional preppy aesthetic similar to that of Polo Ralph Lauren (RL). ^[1] JCG is in direct competition with Jones Apparel Group (JNY) and Liz Claiborne (LIZ), both of which own and produce other brands in addition to their namesake lines. In November 2010, JCG agreed to be acquired by TPG Capital and Leonard Green for $3 billion at $43.50 per share in cash, which is a 29 cent premium with JCG's average closing price in November 2010.^[2]

Business Financials

Fiscal 2010 Results (ended January 29, 2011)

Revenues increased 9.1% to $1.72 billion. Net income decreased 1.5% to $122 million.^[3]

Business Segments

Stores (70% of Net Sales)

The stores segment of JCG includes both retail locations and factory stores. ^[4] Factory Stores are generally located in outlet malls. The factory stores are used to sell merchandise that didn't sell well at retail stores or other merchandise at lower prices than retail and catalog prices. These locations are operated in much the same way as the retail locations, with the difference arising from greater emphasis on higher inventory turnover.^[5]

Direct (27% of Net Sales)

J. Crew conducts its direct sales through the J. Crew website and the J. Crew catalog. J.Crew has two distribution centers in the U.S., one in Lynchburg, VA (this facility doubles as a call center for the whole U.S.), and the other in Asheville, NC.

Catalog The J. Crew catalog serves as J. Crew's primary marketing tool for the J. Crew brand. ^[6]

Online Online sales via jcrew.com are the largest contributor to direct sales.^[7]

Other(3% of Net Sales)

Other revenues consist of shipping and handling fees related to the Direct business.

Trends and Forces

The First Lady's Influence Buoys Sales

First Lady Michelle Obama has worn a number of J. Crew pieces ever since she and her husband entered the public eye, and each piece she wears is soon sold out on the company's website. For example, on a trip to London a photograph was released of the First Lady wearing a cream-colored J. Crew cardigan. It was sold out by 10 a.m. that very morning. In addition, a $198 skirt she wore on the same trip had a 200-person waiting list within days. Clicks for Michelle's ensemble at JCrew.com boosted traffic to those product pages by 3,000 percent. The advertising JCG receives, in addition to having their goods associated with someone who is considered a style icon, has been a boon to the firm's share price.^{[8] [9]}

J. Crew Attempts to Attract More Affluent Customers with High-End Collaborations

Designer collaborations have become a staple of the middle-to-lower end markets, starting with Karl Lagerfeld's collection for H&M. Designer collaborations serve as a way for lower-priced brands to cash in on the name recognition afforded by high-end designers. In addition, even if the particular designer is not as well-known as Karl Lagerfeld or Roberto Cavalli, these collaborations allow consumers access to a brand they would be unable to afford otherwise. J. Crew has begun its own set of collaborations, not with designers but with other brands that fit into its more conservative aesthetic. For example, J. Crew sells outerwear by Barbour and Mackintosh, luggage by Globe-Trotter and shirts by Thomas Mason.^[10] Pieces by such brands sell for 2 to 3 times more than comparable J. Crew items. These collaborations are geared towards attracting a higher-end consumer but also elevate J Crew's brand image. With the addition of higher priced goods, J Crew takes on the perception of a more luxury brand which attracts high end customers and also more low end customers who want to wear a brand with a luxury image.

Increases in Commodity Prices Will Raise Clothing Retailer Prices

Cotton consumption exceeded cotton production for the fifth year in the row, making cotton prices increase by 80.5% from last year.^{[11] [12]} Natural disasters also severely damaged crops in many large cotton producer countries, such as China, India, and Pakistan. This led to decreases in cotton exports from these countries and increases in cotton imports as these countries sought to supplement their supply of cotton. ^[13][14] With limited cotton supplies and rising prices, retailers will either have to absorb these higher material costs, restructure the composition of their clothing to have less cotton, or pass these higher costs to its consumers. Higher clothing prices or lower quality clothing could discourage consumer spending, resulting in decreased net sales. However, adult or teen clothing retailers may not be too adversely affected as their clothing (which is usually 30-40% cotton based) has more flexibility in their composition and thus, costs. In addition, raising commodity prices in other areas will also raise costs for retailers. While premium price and established brands may be able to pass their higher costs to their consumers, value based companies may not fare as well and may suffer from lower profit margins.^[11]

J. Crew Agrees to $3 Billion Buyout

In late 2010, investors TPG Capital and Leonard Green & Partners agreed to buy J. Crew at $43.50 per share, or a total of $3 billion. This price is a 29% premium on JCG's average closing share price for November.^[15] J. Crew CEO and chairman, Millard Drexler, would remain in that role.^[16] However, Drexler may be looking to go private with J. Crew's recent poor performance in Q3 of FY2010 and inability to keep up with fashion trends.^[17] With this acquisition, J Crew may face new changes in its management that would affect its current operations. The stock of JCG would also raise to the purchasing price, less some amount to account for the risk that the deal might fall through before deal goes through.

Competition

• Liz Claiborne (LIZ) sells men's and women's apparel through two main channels. It designs and markets premium brands such as Juicy Couture, Kate Spade, Lucky Brand Jeans and Mexx. In addition it has a group of department-store based brands such as Liz Claiborne, Dana Buchman, DKNY Jeans, DKNY Active and DKNY Men. Claiborne's products are sold through both standalone stores and department stores such as Macy's Inc. (M), thereby increasing exposure to consumers. J. Crew, on the other hand, only sells goods through its own stores and does not have a wholesale division. In addition JCG, primarily a retailer catering to middle-income consumers, has made an entry into the luxury market through collaborations with Mackintosh and Globe-Trotter, an outerwear and luggage company respectively. Claiborne Inc. has supplemented its own premium lines through collaborations between its namesake like (Liz Claiborne) and high-end designers such as Isaac Mizrahi and John Bartlett.^[18]

• Jones Apparel Group (JNY) is a designer, marketer and wholesaler of apparel and accessories. It's brands include: Jones New York, Nine West, Anne Klein, Gloria Vanderbilt, Kasper, Bandolino, Easy Spirit, Evan-Picone, l.e.i., Energie, Enzo Angiolini, Joan & David, Mootsies Tootsies, Sam & Libby, Napier, Judith Jack, Albert Nipon and Le Suit. JCG also has a license with Givenchy to produce, market and distribute jewelry in the U.S., Mexico, Canada and Japan under the Givenchy name. The license expires on December 31, 2011. The company also licenses out some of its brand names, such as Anne Klein New York, Nine West and Jones New York to third-party manufacturers in addition to designing and producing its own products. Some of JNY's brands are sold through individual stores such as Bandolino and Easy Spirit. Other lines are wholesale and thus rely on orders from other retailers. Like Claiborne Inc., Unlike J. Crew or Claiborne Inc., Jones Apparel has not attempted to penetrate the premium goods market outside its license with Givenchy.

• Abercrombie and Fitch (ANF) is a retailer of clothing and accessories. ANF brands include: Abercrombie and Fitch, Abercrombie, Hollister, and Gilly Hicks. Catering to an "aspirational" customer base, ANF considers the products it sells to be "near luxury". ANF and JCG's customer base overlaps on age but ANF usually targets a wealthier crowd.

• American Eagle Outfitters (AEO) is a mall based apparel and accessories retailer. Operating in the United States and Canada, it sells its own brands that include American Eagle Outfitters and aerie. Targeting customers between the age of 14-30, AEO's customer base overlaps with JCG in terms of age. AEO boasts the highest operating margin in the 14-30 clothing retailers group. AEO is currently expanding its aerie brand lines and continues to expand its physical presence as well by opening new stores.

^{[19] [20] [21] [22] [23]}

Footnotes

1. ↑ JCG 2009 Annual Report 10k p.22
2. ↑ http://economictimes.indiatimes.com/news/international-business/J-Crew-Group-agrees-to--3-bn-acquisition-deal/articleshow/6981395.cms
3. ↑ http://phx.corporate-ir.net/phoenix.zhtml?c=135311&p=irol-SECText&TEXT=aHR0cDovL2lyLmludC53ZXN0bGF3YnVzaW5lc3MuY29tL2RvY3VtZW50L3YxLzAwMDExOTMxMjUtMTEtMDcyNjQ5L3htbA%3d%3d
4. ↑ JCG 2009 Annual Report 10k
5. ↑ JCG 2008 Annual Report pg. 25  
6. ↑ JCG 2009 Annual Report 10k p.5
7. ↑ JCG 2009 Annual Report 10k p.5
8. ↑ "Michelle Obama’s J.Crew outfits trigger shopping frenzy"
9. ↑ Michelle Obama Boosts J. Crew
10. ↑ J. Crew website
11. ↑ ^{11.0 11.1} http://seekingalpha.com/article/238731-more-evidence-of-inflation-retailers-report-escalating-commodity-prices
12. ↑ Gap, Wal-Mart Clothing Costs Rise on ‘Terrifying’ Cotton Prices
13. ↑ http://www.thegovmonitor.com/world_news/asia/recession-drought-hail-reduce-cotton-acreage-in-china-12256.html
14. ↑ CNN Money - Cotton Shortage Could Inflate Clothing Prices
15. ↑ http://economictimes.indiatimes.com/news/international-business/J-Crew-Group-agrees-to--3-bn-acquisition-deal/articleshow/6981395.cms
16. ↑ http://online.wsj.com/article/SB10001424052748704369304575632451188970286.html
17. ↑ http://www.businessweek.com/news/2010-11-23/j-crew-agrees-to-3-billion-buyout-offer-by-tpg.html
18. ↑ Liz Claiborne New York website
19. ↑ JCG 2009 Annual Report 10k p.22
20. ↑ Liz Claiborne 2009 Annual Report
21. ↑ Jones Apparel 2009 Annual Report
22. ↑ AF Annual Reports
23. ↑ AEO 2009 10-K