J.Crew Group (
) announced that it agreed to be acquired by funds affiliated
with TPG Capital and Leonard Green & Partners. J. Crew competes
with other specialty retailers like
), Aeropostale (
Abercrombie & Fitch
) and Ann Taylor (ANN).
Under the terms of the agreement, holders of the outstanding
common shares of J.Crew will receive $43.50 per share in cash, or a
total of approximately $2.86 billion. The price represents a
premium of 16% to J.Crew's Tuesday closing price before the
announcement and 29% premium to last month's average price. This is
nearly 3% higher
than our price estimate for J.Crew's stock of
Resilient in Economic Downturn
Last week J. crew announced its 3Q10 earnings reporting that its
store sales increased by 1% and direct-to-consumer sales increased
12% vs. 3Q09. During the recent economic downturn when many of its
peers were badly hit, J. Crew was able to grow revenues by focusing
on basic styles rather than fashion-forward items leading to market
share gains. This strategy is continuing to pay off.
In addition to this, J.Crew has been working on improving its
sourcing and distribution processes, which has helped to reduce
costs and improve gross margin by nearly 6 percentage points during
fiscal year 2009. For the first three quarters of fiscal 2010, its
gross margins were up by nearly 1.5 percentage points vs. the same
period last year.
Women's Fashion Push
The brand has been able to achieve a well-defined identity
through its marketing campaigns, social media and a good in-store
experience. This image has worked well for its women's apparel
division, which has been endorsed by Michelle Obama in the
J.Crew is expected to continue to leverage such marketing
initiatives to enhance its women's line. Currently, women's apparel
constitutes nearly 80% of the revenue from J.Crew stores and
accounts for 34% of our price estimate.
Sales Metrics to Improve
J. Crew's strong brand value, multi-channel operations and
improving margins position the company extremely well to expand its
business. With retail spending picking up in the US, J.Crew expects
strong sales during the holiday season.
Revenue per square foot, a common retail sales metric we track,
increased from around $460 in 2005 to $530 in 2009. We expect it to
approach towards the$700 mark by the end of our forecast period. If
we upped the revenues per square foot to $750, this adds about 3%
to our price estimate.