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Drexler’s Redemption: A Hot IPO for J. Crew As Stock Soars 25%

Millard Drexler and other J. Crew Group Inc. investors became a richer bunch Wednesday as shares of the retailer rallied on the NYSE.

NEW YORK — Shares of J. Crew Group Inc. rallied in their first day of trading on the New York Stock Exchange Wednesday, making the Crew team, led by Millard “Mickey” Drexler, a richer bunch.

Drexler, the 61-year-old chairman and chief executive officer, has 6.8 million shares, which, at Wednesday’s closing of $25.55, are worth more than $173 million. With the initial public offering, Drexler’s stake in the company goes from 22 percent to 12 percent.

With plenty of anticipation and buzz surrounding the Crew debut, volume on day one was huge, with 22.6 million shares exchanging hands and the price ranging from $24 to $26, from the opening price of $20. J. Crew sought to raise at least $376 million with the offering. Reports during the day cited Richard Peterson, a research analyst at Thomson Financial, as indicating that J. Crew’s IPO was the third largest in apparel retail history, behind Intimate Brands, which raised $722 million in 1995, and Saks Holdings Inc., which raised $387 million in 1996. The company is listed under the symbol JCG.

“Considering the IPO was 18 million shares, it means the entire offering of the public float turned over. That’s pretty dramatic,” said Robert Fagenson, ceo of VDM Specialists, one of seven specialist trading firms on the NYSE. VDM trades 300 NYSE issues, including about 16 in retail, among them Dillard’s Inc., Chico’s FAS Inc., Limited Brands Inc., Guess, Kohl’s Corp., Tiffany & Co. and Coach Inc., and now, J. Crew.

“IPOs in general in 2006 have not performed as well as J. Crew did,” Fagenson added. “There’s tremendous attractiveness to the brand and significant positive spin out there on this management team. The positive prospects are reflected in the price of the stock.”

The response to the stock represents not only an official comeback for the Crew label, but also sweet satisfaction for Drexler. After driving dramatic growth of Gap through the Eighties and Nineties with innovations of basic product and retail methods, Drexler — who became one of retailing’s wealthiest men — was pushed out by the board in 2002 after several slumping seasons.

Known for his passionate approach to merchandising, Drexler articulated his approach to the Crew business earlier this year, telling WWD: “We are driven by the creative. We are driven by building businesses.…Any fashion business must constantly evolve — design- and style-wise.”

Last year, Drexler received a salary of $200,000, restricted stock awards totaling $804,000 and $751,000 for other annual compensation that largely included reimbursements for use of a private aircraft for business travel by him and other employees, according to the prospectus. Drexler is a principal in the company that owns the aircraft.

Jeff Pfeifle, the 48-year-old president, received a salary of $781,200, a $400,000 bonus and $201,000 in restricted stock awards.

James Scully, executive vice president and chief financial officer, received a salary of $188,200, a bonus of $250,000, $230,000 for other compensation and stock awards amounting to $469,000.

Tracy Gardner, executive vice president of merchandising, planning and production, received a salary of $492,300, a $350,000 bonus and stock awards of $327,000.

Another major shareholder is Emily Scott, a director of the company and daughter of the founder of J. Crew, Arthur Cinader. She has 5.4 million shares, representing a 10 percent stake, from 17 percent, pre-IPO.

The company has been controlled by the Texas Pacific Group private equity firm for nine years. With the IPO, TPG will have 40 percent of the company’s stock, from 56 percent, pre-IPO.

J. Crew will use the money raised through the IPO to redeem preferred stock, cut debt and fuel growth.

Apparel-fashion stocks can be volatile, considering the fickle nature of fashion. There are also concerns that there could be a consumer slowdown with inflation, interest rates and fuel costs rising. And Wall Street is very demanding, looking for retailers to post steady gains in same-store sales, profits and margins and to be on a fast growth track. “Retail is subject to volatility around the release of significant statistics, such as same-store sales and earnings,” VDM’s Fagenson noted.

However, investors seemed to be betting on the strength of the 23-year-old J. Crew brand, its growth potential and its savvy management, led by Drexler and Pfeifle.

“The market is paying for the experience of the management, and the leader who re-created the product,” said Jennifer Black, president of Jennifer Black & Associates. “He’s got a long-term vision. It’s very focused and Mickey Drexler has done a great job of articulating where they are going and what they stand for. And in retail, that’s what it’s all about.”

Drexler and Pfeifle, both former Gap executives, joined J. Crew three-and-a-half years ago. They have overhauled J. Crew’s merchandise, revived the J. Crew spirit, cut costs and developed growth vehicles ranging from new categories to new divisions, including Crewcuts for children’s wear and the upcoming Madewell brand, which will be a bit edgier than J. Crew, but priced lower and completely casual.

Last year, J. Crew posted net income of $3.8 million, a big improvement over the prior year’s loss of $100.3 million. Sales rose 18.5 percent to $953.2 million.

Goldman, Sachs & Co. and Bear Stearns & Co. Inc. were the lead underwriters for J. Crew’s IPO.

Considering J. Crew’s high profile and strong start on the NYSE, “this is going to be a closely watched member of the retail community,” Fagenson observed.