NEW YORK — Can Millard "Mickey" Drexler stop the bleeding at J. Crew Group?
Drexler, named chairman and chief executive of J. Crew in January after finishing his glorious tenure at Gap Inc. on an inauspicious note will have his work cut out for him, as demonstrated Thursday when his new employer reported a severance-fattened loss of $11.7 million for the fourth quarter.
Taking charge of a morning conference call to discuss results with investors and analysts, Drexler focused on merchandising issues, asserting that the retail chain with catalog roots needed to raise its quality and its price points if it’s to recapture lost customers and attract new ones. He expects the repositioning of product to be completed within a year, in time for spring 2004 selling.
Drexler said he is spending time in stores, reworking presentations to make focused lifestyle statements within the assortment, rather than simply stacking goods on tables. In addition, he said he has removed the merchandise that does not represent the Crew brand.
"Whatever we could influence and change for August and September we have changed, but the concept was designed and the team just went in and did what we could," he said. "Hopefully, you will see some signal of change by the third quarter and we are now working and completing holiday."
He described his new corporate home as "a jewel in the marketplace."
However, its most recent results were hardly sparkling. Including a $7.7 million pretax charge for severance and other one-time employment-related costs, the 156-unit specialty chain posted a net loss of $11.7 million for the three months ended Feb. 1, reversing year-ago net income of $6.7 million. Gross margins declined 320 basis points to 38.4 percent from 42.3 percent due to more markdowns.
Overall revenues for the quarter fell 2 percent to $241.8 million compared with $246.7 million last year. By division, sales in its retail group were up 2 percent to $128 million, but comparable-store sales declined 7.5 percent. Direct division sales decreased 6.2 percent to $86 million, comprised of a 7 percent increase to $48 million in Internet sales, offset by a 27 percent decrease in catalog sales to $38 million. Factory sales were flat at $18 million.Drexler, who succeeded his former Gap colleague Ken Pilot at the helm of Crew, said Crew lacked its own personality: "We tended to look like a lot of other category players in the mall."
The sameness didn’t happen overnight. "The quality was dramatically taken out of product over the past three to five years, while Emily Woods, the daughter of the company’s founder who owns 20 percent of the company, was not involved," Drexler said, bemoaning the previous lack of merchandising talent at the top. "We are coming in looking at the bad habits developed over time."
Some of these, he noted, were organizational, as different portions of the business didn’t communicate or weren’t accountable to each other. This resulted in a lack of cohesiveness that manifested itself in, among other ways, such as different prices between the retail stores and the direct business.
Having overseen Gap’s expansion from regional jeans outlet to the world’s largest apparel specialty chain, Drexler doesn’t want to go back to what Crew was but instead seeks to go beyond it. However, he would like to get back to some of the iconic styles — roll-neck sweaters and barn jackets —by which Crew established itself.
"We are trying to differentiate ourselves competitively," the ceo said. "I don’t know a lot of businesses that address the J. Crew style the way people are looking for, so we are getting back to what J. Crew represents."
Crew, which has about 5 percent of Gap’s retail units, appealed to Drexler, among other reasons, because, as he pointed out as he announced his decision to leave Gap last May, the responsibilities of being the ceo of a retail powerhouse had removed him from the merchandising side of the business. "Crew is a small company which I like because it enables us to do things quickly and in a focused way," he said.
But asked how he expected to boost sales while at the same time raising prices, while other stores promote in an already deflationary environment, Drexler said Crew’s customers, who already buy expensive cars, want more quality and are willing to spend more for it."I’m betting a lot of my own life there," he said. "There is a need for a quality player. That is why I found this an attractive investment. While it has traded down dramatically, it is doing $350 in sales per square foot in only 156 locations. That is a huge benefit."
As part of his entrance, Drexler invested $10 million in J. Crew.
Drexler said he expects Crew to grow to between 250 and 300 units, adding that he likes being in the position of having less to work with. "More is not always better," he said.
Drexler also said the company is planning to overhaul the catalog, which he said was a "junk book" because it had too many items. The company plans to cut offerings to about 550 this fall from 750 last year as well as reducing the circulation and eliminating the four women’s-only catalogs. He said the catalog is an important marketing vehicle when done right, especially as a driver for online sales.
Dana Telsey, a retail analyst at Bear, Stearns, said, "Drexler has a big job ahead of him. The issue is the product, which needs to improve both in styling and in terms of quality."
"Over the past three to five years, we have been speaking down to the customer and systematically devalued the lifestyle and perspective and the point of view, and the quality by doing things like promotions and adding more product offering to the store and product density to our pages," said Scott Gilbertson, J. Crew’s chief operating officer.
In 2002, Crew losses grew to $31.6 million from a net loss of $11 million in 2001. Annual results include employment related pre-tax charges of $13.7 million in 2002 and $3.2 million in 2001. Revenues for the 12 months were $766.4 million, a 1.5 percent decrease from sales of $777.9 million. Comps declined 10.4 percent.
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