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Crew’s New Captain: Can Drexler Reverse Ailing Brand’s Drift?

NEW YORK — Texas Pacific Group may have finally found its J. Crew exit strategy in Millard Drexler.The investment group Monday named former...

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NEW YORK — Texas Pacific Group may have finally found its J. Crew exit strategy in Millard Drexler.

The investment group Monday named former Gap ceo Drexler the new chairman and ceo of J. Crew, succeeding as ceo his former Gap colleague Ken Pilot, who had been in the job for only five months. Emily Woods, who remains on the board, had been chairman.

TPG hopes Drexler can sharpen J. Crew’s image, maximize its brand potential, and, eventually, allow it to cash out of its flagging investment. The TPG investor group bought J. Crew in 1997 for $560 million and intended to take the company public in spring 2001, but backed off after the market turned volatile and Crew’s performance weakened. Reportedly, TPG has also tried to sell J. Crew and approached several potential buyers. According to one source, "A few years ago, TPG could have doubled its money, but they probably thought they could get more."

Now, the company that was worth almost $1 billion six years ago when TPG bought it is worth less than half that, brought down by a revolving door of ceos and senior managers who were brought in to turn around the operation but failed.

TPG’s style has been to get in and out of investments fast, holding companies typically for two to three years, five years at most. With J. Crew, the plan was missed. TPG owns about 60 percent; 20 percent is owned by Emily Woods, the daughter of the company’s founder, and the remaining 20 percent is held by other, unnamed investors. Other TPG holdings include Bally, Petco, Punch Taverns in the U.K., Ducati, Beringer Wines, Hotwire travel Web site and a stake in America West. It purchased Burger King in December and also made a run at U.S. Airways when the airline hit financial difficulties.

As part of his arrival, Drexler bought a 3 percent stake in J. Crew for $10 million and probably got a low entry price so there’s more incentive for him to take the company public. He also could lure other investors, thereby reducing TPG’s stake.

Drexler was ousted at Gap last fall, after years of eroding sales and declining market share, and was replaced by former Walt Disney Co. executive Paul Pressler. About the same time, the chain began to show a sales rebound as a result of a return to basic and classic styles, largely due to Drexler’s final fall push. He still commands credibility in the marketplace as a great merchant, despite struggling for years to turn around Gap.
"Mickey has the ability to bring in investors and take J. Crew public over the long term," said Andrew Jassin, managing director of Jassin O’Rourke Group, a management and marketing consulting firm.

"It’s an extraordinary opportunity for Drexler and J. Crew," said Hal Reiter, ceo of Herbert Mines Associates executive search. "If anybody can blow out J. Crew, it’s Mickey Drexler. Nobody knows the customer better than him."

In the third quarter ended Nov. 2, J. Crew said waning sales conspired with gross margin erosion resulting in a net loss of $700,000. That compares with the year-ago quarter when the company realized profits of $300,000. Sales for the period declined 2.9 percent to $189.9 million from $195.6 million last year, as comparable-store sales plunged 11 percent and sales at J. Crew’s direct business decreased 8.7 percent. While privately held, J. Crew reports results because the company has public debt. Crew has annual sales of about $800 million.

Officially, TPG contends it’s not lost patience with J. Crew. As a TPG spokesman said Monday: "It is fair to say that TPG is committed as ever to J. Crew. We’re looking forward to working with Mickey to create shareholder value. This is a firm commitment by J. Crew’s majority shareholder and one of the leading retail executives in the U.S. to regrow the J. Crew business. We view it as a terrific opportunity."

But growing J. Crew won’t be easy. Problems stem from a string of management upheavals in the past several years, which caused the brand image to fade. Each regime had "too many cooks in the broth," as one source said. Past ceos had to contend with TPG getting more involved as the company’s business weakened, as well as with Woods.

With such a range of opinions on offer, look for Drexler to try to solidify power fast, and a changing board complexion with some Drexler allies. For one, he’s already brought in Jeff Pfeifle, former executive vice president of Gap’s Old Navy division, as president. The board includes TPG’s David Bonderman, Richard W. Boyce and James G. Coulter, as well as Gregory D. Brenneman, ceo of Turnworks Inc. equity firm; retail consultant and former Federated executive John W. Burden 3rd; David M. Schwarz, ceo of Architectural Services Inc.; Thomas W. Scott, founding partner of Nantucket Allserve beverage supplier; Brian T. Swette, an eBay senior executive; Josh S. Weston, a former chairman and ceo of Automatic Data Processing; Woods, and Drexler.
Aside from playing board politics, Drexler’s turnaround skills will be tested — especially since it’s not the kind of turnaround he’s used to. Crew has a catalog business that appears maxed out in growth potential, despite all the experimentation in recent years with new formats and categories. Even more significantly, Crew has never gotten its retail business in sync with its catalog business. Its 152 stores don’t project the lifestyle image and energetic mood of the catalogs. Moreover, both divisions are challenged to differentiate from other American brands, like Ralph Lauren, Abercrombie & Fitch, American Eagle Outfitters and even Gap’s own Banana Republic.

Growth through retail buildup is precisely what TPG is hungry for, even during a period when analysts contend the U.S. market is substantially overstored. J. Crew has only about 100 full-price stores, after about 15 years in retail, ever since the first J. Crew store opened in the South Street Seaport here. A former ceo, Mark Savary, now at Pepperidge Farms, once said Crew could operate at least 300 stores. This year, only four stores are slated to open.

"It’s been screwed up for so long, but the brand is absolutely salvageable. Mickey will look at the product and rejuvenate the brand," predicted Martin Richter, vice president of the Kazu Apparel Group, a private label supplier.

Drexler took a first step at boosting morale by addressing Crew’s entire crew of around 400 at the 770 Broadway headquarters here Monday morning. He said he would be fine-tuning fall product, and believes there’s huge growth opportunity for the brand, but didn’t specify any immediate plans or strategies. One possibility aside from rolling out J. Crew stores is to introduce J. Crew kids’ stores next to the adult stores. Drexler was very successful rolling out GapKids.

While everyone is applauding his return to the industry after leaving Gap, not everybody is convinced Drexler still has the magic touch. Several also pointed to Drexler’s lack of operational skills, which were exactly what the Fisher family at Gap sought when they found a replacement for him. Pressler has no apparel merchandise experience, but is considered strong on operations.
"Mickey is an excellent merchant, [however,] it’s different from being a great business operator. There are some questions with the operations of J. Crew’s business," said Elaine Hughes, ceo of E.A. Hughes & Co. executive search. "When J. Crew was at its best, the vision came from Emily Woods, and someone else was running the business. Putting [Mickey] in charge of everything is questionable." But she added that, at Gap, the merchandise in the stores defined the stores. "If Mickey can get the product to have a point of view and it can be translated in the stores, that would be great."

"Mickey’s strengths play into J. Crew’s weakness," said Todd Slater, retail analyst at Lazard Freres. "For J. Crew, it gets a proven merchandise prince who has fallen from the ivory tower and is available to take on this reclamation project. And for Drexler, he gets both a financial and personal reward. He can recover his reputation. J. Crew suffers from all the common ailments of a discombobulated specialty retailing store. Its merchandise is unfocused, it has made poor real estate decisions and management played musical chairs, which all negatively impacts consistency."

Slater said Drexler could improve J. Crew’s store productivity by upscaling the brand and moving away from the overstored teen segment.

Dana Eisman Cohen, a retail analyst at Banc of America Securities, said, "J. Crew has lost its way identifying itself in the marketplace and they do a terrible job at merchandising the product on the floor. Mickey’s talents are very suited to the problems."

Jennifer Black, retail analyst at Wells Fargo Securities, believes there are opportunities for J. Crew to be unique. "What is missing is a timeless, yet chic line at compelling price points."

Ellis Verdi, president of the DeVito/Verdi ad agency, observed that "J. Crew needed someone with a new creative vision. [Drexler] can expand the store base, and they need to make the store and the catalog more exciting."

Donald Ziccardi, ceo of Ziccardi Partners Frierson Mee, said, "I think [Drexler] always felt that he wanted to be an entrepreneurial executive and wanted to go into his own business. [Drexler and Texas Pacific Group] are investing $20 million and there will be a lot of changes. They’ll re-look at the merchandising mix and the branding. They’ve lost their image and need to get it back."
"If anybody can make it happen, it’s him," said Sam Shahid, partner in Shahid & Co., the ad agency here. "I think J. Crew has really gone down, and doesn’t have the excitement it had. He’ll bring new energy and new vitality."

Said Arnold Aronson, managing director of retail strategies, Kurt Salmon Associates: "The size and scale of J. Crew are tailor-made for the talents, merchandise acumen and leadership of Mickey Drexler. J. Crew hit the lotto jackpot when they signed him up."