By and and and
with contributions from Kellie Ell
 on March 3, 2014

Investors in Tokyo liked the idea of Fast Retailing Co. Ltd. acquiring American retailer J. Crew Group Inc.

Shares of Fast Retailing, Asia’s largest apparel retailer, rose 1.2 percent on Monday to close at 35,480 yen, or $348.46 at current exchange, on a day that saw the Nikkei 225 shed 1.3 percent.

Fast Retailing is said to be in the early stages of discussions to acquire J. Crew from TPG and Leonard Green & Partners in a deal that could be valued at up to $5 billion. According to sources, a transaction could be completed within the next two months.

RELATED STORY: Fast Retailing Setting Sights on J. Crew >>


Other firms are said to be eyeing J. Crew as well, and its owners are said to be continuing to evaluate the possibility of an initial public offering for the chain. Over the weekend, Reuters reported that South Korean fashion company E-Land Group was also interested in buying J. Crew but a spokesman for E-Land has since issued a denial. He said Monday that the report was untrue and the company has “no plans” to buy J. Crew. E-Land’s assets include K-Swiss, Coccinelle and Mandarina Duck.

Analysts generally applauded the thought of a Fast Retailing/J. Crew combination. Euromonitor International’s apparel analyst Ashma Kunde said, “With Fast Retailing’s target of becoming the world’s largest apparel retailer by 2020, and hoping to reach the number-one spot in the U.S., the company could not have picked a more suitable target.”

The London-based analyst said that while Fast Retailing’s Uniqlo chain has been shouldering the weight of the parent firm’s expansion plans, it’s presence in the U.S. remains limited to big-city locations.

“As of February 2014, the brand operated 17 stores in the U.S., with plans to add 20 to 30 new stores per year over the next few years to reach 100. It is a slow-burn strategy, and Fast Retailing needs something instant if it wishes to come close to its target by 2020,” she concluded.

Although the Japanese group has stakes in American contemporary brands Theory and J Brand, “Fast Retailing needs something meatier to beef up its market share [and] J. Crew would certainly ramp up the pace,” Kunde concluded. She noted that J. Crew had a 0.7 percent share of the U.S. apparel market, while Fast Retailing’s was less than 0.1 percent.

Kunde noted that J. Crew would benefit from the Japanese firm’s retail expertise, “as J Brand has done, particularly in terms of stepping up its store expansion in Europe.”

Analysts also speculated whether Fast Retailing is considering opening J. Crew stores in Japan.

Kunde noted that the American brand once operated 70 stores with a Japanese partner, but later withdrew from the market.

Toby Williams and Takako Wenisch, analysts at Macquarie Equity Research in Japan, predicted that a J. Crew Asian expansion could add $40 million to $80 million in earnings before interest and taxes to Fast Retailing. Presuming $3.7 million in annual sales for the average J. Crew store — compared with a figure closer to $10 million for Uniqlo, which has some very large stores in its portfolio — the analysts predicted that 100 J. Crew stores at “$4 million per store and a 10 percent margin would add $40 million to EBIT [while] 200 stores would, in theory, add $80 million.” They noted that Fast Retailing has an “excellent ability to obtain competitive locations at attractive rents across Asia.”

On the sourcing side, the Macquarie analysts said Uniqlo’s gross margins are nearly 50 percent on an adjusted basis for currency fluctuations, while J. Crew’s are closer to 44 percent. Given potential sourcing synergies, they said raising J. Crew’s gross profit margins to Uniqlo levels “would increase EBIT by about $125 million to $150 million.”

While Fast Retailing could learn much about online retailing from J. Crew, the Macquarie analysts raised an interesting question: “[T]he really big upside to this potential deal, in our view, would be whether Mickey [Drexler, chairman and chief executive officer of J. Crew] could pull together a second team to roll out Uniqlo across North America.”

The analysts concluded that if anyone could push Uniqlo out across the U.S., it is Drexler, since few retail executives understand the “U.S. consumer, U.S. logistics and U.S. retail space as well as Mr. Drexler.” But they also questioned whether Drexler could do so “whilst maintaining J. Crew’s success.”

Still, a buyout would be considered a major coup for Tadashi Yanai, chairman, president and ceo of Fast Retailing. Long an admirer of Drexler, Yanai borrowed much of the casual basics playbook the American merchant developed during his years at Gap Inc. and used it to successfully march Uniqlo out across the world. Uniqlo, while still seen as a low-price chain in Japan, has been moving fast to raise its style quotient in global markets.

 

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