J.Crew’s American Dream Facing Hurdles Overseas
June 15, 2015
J.Crew, the preppy retailer known for clean, tailored lines and embellished classics, is under scrutiny for a less-than stellar collection, sub-par financial results and high prices overseas. And the company’s latest international expansion strategy, generally a risky move for retailers and something J.Crew has dabbled in before pulling back before, is lining up a raft of additional obstacles.
After cutting its number of stores overseas in 2008, J.Crew stuck its toe back into international waters in 2011, when it opened an outlet in Toronto, Canada. But more recently, and potentially more tricky, has been the company’s expansion to Europe, which began rolling out in 2013. Coupled with design and fit problems, it has not been smooth sailing for the retail giant, which is also acknowledging the likelihood of future turbulence.
A company earnings call on Thursday revealed that the retailer’s sales for the first quarter of 2015 decreased 5 percent to $508.7 million. Total revenue for J.Crew Group Inc., the parent of the entire J.Crew operation, including Madewell, J.Crew Factory and children’s brand Crewcuts, saw a 2 percent decrease in revenues to $581.8 million, the company said. This equated to a $462.4 million net loss, following the previous quarter’s $657.8 million net loss. Madewell continued to be the bright spot in J.Crew’s earnings, increasing sales in the first quarter by 33 percent to $61.9 million.
“We are, needless to say, fairly disappointed with the results,” J.Crew CEO Millard “Mickey” Drexler said on the earnings call. “We recognize there’s work to be done, and we’re on it.”
Drexler says the business is working to update fits across the board to provide consistency—an area that has proved seriously problematic for the retailer recently—and will be pushing more of its “classics,” such as crew neck sweaters, in the knits and sweaters assortment going forward.
“We didn’t have the right cardigan,” Drexler said. “We had a cardigan, but it didn’t fit that well, so that was one problem.” Drexler also said the chain did not order enough of the Tippi-style sweater, and ordered too many Tilly-style sweaters.
The sales culture that has taken over the women’s apparel sector—with many shoppers now reluctant to purchase full-price items—has also contributed to J.Crew’s problems.
Heavy discounting also plagues plenty of other brands aside from J.Crew, but the retailer has, at times, discounted more items than other chains. The business had a 38 percent increase in discounts offered as part of Black Friday markdowns in 2014 compared to 2013, according to data from WGSN INstock, a retail analytics tool. That’s the second highest of all the retailers measured, behind only Target.
“During the first quarter, the company experienced a further significant reduction in the profitability of its J.Crew reporting unit, primarily driven by performance of women’s apparel and accessories, which the company expects to continue at least through fiscal 2015,” J.Crew says in an earnings release.
Before its troubles of 2014 and 2015, J.Crew, under Gap legend Drexler and quirky-cool Jenna Lyons, was flying high. The brand started showing at New York Fashion Week for the first time and inspired the social media hashtag #JCrewEverything.
Rumors of an initial public offering (IPO), which would have allowed the privately-owned company to trade publicly, swirled in 2014. But under private equity owners TPG and Leonard Green & Partners, an IPO never materialized. A TPG spokesman deferred to J.Crew for a comment for this article, while Leonard Green and J. Crew did not respond to requests for comment.
Overlapping with financial and design issues is J.Crew’s international expansion strategy, following the brand’s global pullback in 2008.
Despite sales declines, J.Crew said in Thursday’s earnings call that it will continue to roll out the planned opening of 52 new stores—including new Madewell and J.Crew Factory locations—in 2015.
In London, J.Crew has opened five stores. The city is a major menswear shopping destination, with brands including Hackett London, Oliver Spencer, Liberty,and Paul Smith.
“The problem with London is that London is the home of menswear,” says retail consultant Jane Hali. “If you’re going to buy classic menswear, you’re going to go to Hackett.”
J.Crew has branches within a short walk of Hackett stores at both Regent Street and Sloane Square, areas with a high concentration of European luxury brands.
Rents in both locations are high. “Regent and Sloane are both very expensive and amongst the highest rents in London,” says Patrick Cox, a senior analyst at Pragma Consulting, a London-based retail and consumer market consulting firm. “One of the big obstacles on both streets is the huge levels of key money that has to be paid—basically a premium upon signing of the deal, in order to secure the right simply to pay rent,” Cox says.
Hackett provides men with custom suiting, classic menswear, tailoring and luxury accessories, with clothing that ranges from roughly £70 to £1,100 (about $107 to $1,680).
Prices for J.Crew’s menswear in the U.S. are similar, but in London the brand’s prices are even higher.
There have been complaints that costs in J.Crew’s London stores are up to 20 percent more than in the U.S. The London Telegraph says the brand seems to merely have switched the price tags from dollar signs to pound signs which, given the exchange rate, leaves Londoners paying a lot more.
A J.Crew spokesperson told the newspaper: “We have to take into consideration various taxes, duties, and operational charges that vary from country to country. It is an inescapable fact that these costs in the UK are significantly higher than in the US. There are not many products that don’t vary in price from country to country…cars, cosmetics, electronics and so on. It is simply a fact of life.”
It’s worth pointing out that J.Crew isn’t the only American retailer to mark up prices overseas—Levi’s jeans also cost more in London. But reports are that some have seen J.Crew’s London stores looking fairly empty.
J.Crew also expanded quickly in London, with four stores, one men’s store and a shop inside Harrods for Crewcuts, the brand’s children’s line, in less than two years.
Cox, the retail market analyst, says London can be a J.Crew market, but the brand needs to differentiate its offerings from those of its competitors.
“J.Crew can compete if it carves itself a niche—i.e. the more style-conscious Ralph Lauren; aspirational, classic but on-trend lines,” she says.
In March, the retailer opened its first store in Paris, on Rue Malher in the fashionable Marais district. “We felt the next natural step was Paris…it’s been on our list,” Drexler told Bloomberg.
“There is part of French dressing that is very classic,” says retail consultant Hali. “Classic lines are part of their fashion.”
J.Crew’s Paris store will compete with other brands that sell classic apparel. American brands, including Tommy Hilfiger, have done well in France, according to Hali.
Financial figures for how J.Crew’s international stores are performing are not available, and despite a healthy dose of skepticism making a splash with huge flagship outposts is in theory a way for the American retailer to enter the European consciousness, which is largely oblivious to the brand, according to Cox.
“The trick is not to rush it. Work out what works in each country, and tailor the offer if needs be,” Cox says. “Each European country is different and it’s very important to understand local customers before rolling out.”
Though quality, design and cost issues have surfaced in recent months, J.Crew says in a January SEC filing that it competes with other specialty apparel companies on “quality, design, customer service and price.”
“We believe our success depends in substantial part on our ability to originate and define product and fashion trends as well as to timely anticipate, gauge and react to changing consumer demands,” the company says.
Before J.Crew hopped over the pond to Europe, the company crossed the U.S. border to Canada in 2011. Now, J.Crew operates 16 stores in Canada, as well as two in Hong Kong, five in London and the one in Paris.
The 24 international stores make up about 8.5 percent of the brand’s total store count. J.Crew Group operates 280 J.Crew retail stores, 139 J.Crew Factory stores and 85 Madewell stores.
Cox says likely potential sites for J.Crew to expand include Munich, Milan, Madrid and perhaps even Scandinavia, but cautions that the retailer needs to stick to big cities with mature retail markets.
When J.Crew moved into Hong Kong, it used a strategy that retailers often employ when expanding internationally, operating a store-within-a-store before opening its own locations. Drexler said that the venture “did really well.” But Asian shoppers have typically gravitated towards logo-branded merchandise, which J.Crew doesn’t sell.
The brand has not specified how much has been spent on international expansion, but is still looking to expand overseas.
“Although our international revenues are a small percentage of our business, we expect they will increase as we execute our long-term strategy,” the company says.
J.Crew’s financial decline started in 2014, after it began its international expansion, yet Drexler cites it as one of the ways the brand will turn around its problems. It remains to be seen whether the strategy, in the midst of distracting financial and design issues, will prove profitable.
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