By and  on November 3, 2005

NEW YORK — Do J. Crew Group and Wall Street have a case of the jitters?

The specialty retailer on Wednesday delayed its long-awaited $200 million initial public offering until early 2006, most likely due to Wall Street losing its affection for retail shares and to concerns over the state of U.S. consumer spending. A J. Crew spokesman said Wednesday the company would not comment on the IPO or the reasons for its delay.

Still, analysts took a stab at why the retailer, one of the hottest around thanks to the turnaround efforts of Millard Drexler and his team, would hold off on its IPO, suggesting it's a case of bad timing. Analysts said uncertainty over the spending power of shoppers could have soured investors' appetite for IPOs in the retail sector. As a result, the valuation of J. Crew's IPO would be less desirable to investors.

J. Crew is probably being conservative, analysts also said. By waiting until early next year, the retailer might find itself in a more favorable market, such as last spring when specialty retailers Zumiez Inc., Volcom Inc., DSW Inc. and Citi Trends Inc. had successful IPO launches.

J. Crew revealed the delay of the IPO on Tuesday, in a filing with the Securities and Exchange Commission. The retailer, which has been majority owned by Texas Pacific Group since 1997, also announced an extension of a tender offer relating to its senior subordinated notes.

The company was expected to go public as early as this month, or at the latest by the end of 2005 after it filed a registration statement with the SEC for the IPO on Aug. 17. Earlier reports had pegged J. Crew's IPO to happen no earlier than spring 2006, and possibly the fall of next year. Goldman, Sachs & Co. and Bear, Stearns & Co Inc. are underwriters for the offering.

Tim Shimotakahara, an associate at investment banking firm D.A. Davidson & Co., said J. Crew's IPO delay was likely due to worries over the strength of consumer spending.

"I don't think it's an absolute weakness in the consumer market," said Shimotakahara, whose firm was involved in both the Zumiez and Volcom issues. "I think it's a perception of weakness ... That can be a killer to an IPO because you really want to go out there and maximize valuation, and the only way to do that is to get a strong engine of institutional investors who are willing to buy into the party line that, 'Yup, the consumers are strong.'"A hedge fund portfolio manager, whose fund invests primarily in retail and apparel stocks, said the current market is not prime for IPOs. "The equity market right now isn't that great. Stocks are going nowhere. You've got pressure on the high yield market, interest rates are heading higher and there's concern about increased inflation. The economy overall isn't that good, and companies and investors don't want to invest money right now."

In its latest second quarter, J. Crew had net earnings of $2 million, versus a net loss of $14 million in the year-earlier period, while operating income jumped to $20 million from $8 million in the prior year. The company saw revenues rise to $229 million from $188 million a year ago, while same-store sales were up 15 percent.

From 2003 to 2004, J. Crew turned around its operating loss of $31 million to an operating profit of about $38 million, helped by sales of higher-priced, higher-quality merchandise.

Howard Tubin, senior analyst at Cathay Financial who follows the specialty retail market, said it's best for the company to go public when it's still early in an operational turnaround, which many would say J. Crew is in. "You want to try to time it so you catch [an IPO] at the early stages of a turnaround. The merchandise [at J. Crew] has now been repositioned," Tubin said. "I would say that maybe if they IPO in the spring of next year, they can make their sale that much easier if they had a good Christmas ... maybe they can get a higher valuation."

J. Crew has $682 million in debt and preferred stock, and the company said it would use the IPO proceeds and borrowings under a new term loan to redeem outstanding cumulative preferred stock and some debt.

But due to that debt load, Francis Gaskins, president of IPO-tracking Web site, said J. Crew is "just trying to use the [IPO] funds to restructure their debt ... I think they would go public now if they could. I think they test-marketed it and people said, 'Forget it.'"

Gaskins added, "The IPO market is not that bad if the company has a good income statement." That is, investors want to see strong past earnings and sales as well as a strong outlook for growth, or, as Shimotakahara noted, "easily articulated profitability forecasts," which investors are apt to reward during an IPO. J. Crew, Gaskins said, has not posted the consistent financial results that investors like to see.Still, one fund portfolio manager observed, "The product looks great and it's selling, so it's not the [financial results] that are a concern. The problem right now is the equity markets. No one wants to invest in retail in this environment."

That said, while Shimotakahara thinks a company of J. Crew's size is large enough to benefit from going public, he noted that "the capital markets are an unforgiving beast." So it behooves newly public companies to know that they can meet financial forecasts from the start. Otherwise, "you're going to get pushed around in the stock market, and you're not going to have the type of liquidity you had when investors were seeking you."

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