Looking at J. Crew's Business Value as Buyout Closes

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J.Crew Group ( JCG ) is a specialty retailer selling women's, men's and children's apparel and accessories under the J.Crew, crewcuts and Madewell brands. It competes with Aeropostale ( ARO ), American Eagle Outfitters Inc. ( AEO ), AnnTaylor ( ANN ), and Gap Inc. ( GPS ). We currently have a Trefis price estimate of around $42.35 for J.Crew Group's stock , which is roughly in line with the current market price.

We estimate that J. Crew in-store women's apparel constitutes around 34% of our price estimate and internet & catalog orders adds another 32%. The crewcuts & Madewell stores contribute another 11% and J. Crew in-store men's apparel another 8%.

We discussed before how J. Crew could benefit from its acquisition by funds affiliated with TPG Capital and Leonard Green & Partners in an earlier article titled J. Crew's Prospects Brighten on Earnings, Buyout )). The acquisition was completed earlier this month for $43.50 per share in cash. However, the deal came under fire as both parties have been accused of not following best practices. Among the complaints, TPG and Leonard Green were able to complete this deal without having to offer much of a premium to the market price, and so some shareholders felt like their interest were not best served

Looking at J. Crew's Brand

J.Crew has successfully groomed its brand by combining a consistent and positive in-store experience with its marketing campaigns. As a result, the brand has been able to achieve a well-defined identity by associating itself to a particular lifestyle. During the recent economic slowdown, it also by focused on basics rather than fashion-forward items that helped it perform reasonably well versus its peers.

In its internet & catalog orders business, the company has established a stable supply chain and utilized the latest e-commerce technology for order management, product fulfillment and customer service, which has enabled the company to gradually reduce the lead times and shipping and handling fees. This provides a strong foundation to build its business.  The internet & catalog business can provide customers sizes that are generally difficult to find in common stores as well as special designs and collections which might only be available in flagship stores.

The crewcuts & Madewell brands have a strong traditional product offering conforming to the brand image of J.Crew. This can help to attract customers who shop at J.Crew stores. While Madewell is a classic American denim label, crewcuts offerings include preppie argyles, embroidered critters and cable knits for kids. The crewcuts & Madewell brands have the potential to scale efficiently by leveraging the operating resources and customer base of the already established J.Crew brand.

Value Lies From Execution

However, J.Crew's men collections are premium priced and therefore more susceptible to economic slowdowns when people cut down on spending. This can have a negative impact on the company's revenues in the future. In addition to this, J.Crew only has just two distribution centers to cater to both its stores and direct businesses. To expand its internet & catalog orders business, the company may require more distribution centers to maintain competitive lead times, and shipping and handling fees.

The revenue per square foot for J.Crew stores increased from around $457 in 2005 to $531 in 2009, representing an annual growth rate of around 4%. The economic slowdown between 2007 and 2009 had a modest negative impact on J.Crew's revenue per square foot largely due to demand for J.Crew's traditional product offering and J.Crew's willingness to sacrifice margins to maintain overall revenues.

Going forward, we expect that the division's revenue per square foot will show a positive trend as the economy recovers and will reach near the $700 mark by the end of the Trefis forecast period. However, if it reaches around $800 by the end of our forecast period, it would mean an upside of around 6% to our current price estimate.

See our full estimates for J. Crew.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: AEO , ANN , ARO , GPS , JCG

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