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Analyst: J. Crew appears 'financially broken,' but brand not completely dead


The clear signal sent by these first quarter numbers is that J. Crew is a company in trouble. As much as the business is used to decline, the accelerated pace of deterioration, as evidenced by the 6.3% drop in overall sales and the 12% fall in J. Crew comparables, is worrying. That this weakness comes off the back of negative prior year numbers suggests that the company has not yet reached rock bottom.

The sharp drop in sales has damaged the bottom line where operating losses widened to $153 million from a little over $7 million in the same period a year ago. Although J. Crew managed to claw some of this loss back from income tax benefits, this was partly offset by an interest payment of $20 million on its $1.5 billion of long-term debt.

Overall, we believe the company is in a parlous state. In this context, recent management changes appear to be little more than rearranging deck chairs on the Titanic. There is always an argument for change, but change by itself is neither a strategy nor a solution - it needs to be accompanied by a blueprint for reinventing the business.

While J. Crew has some rudimentary plans for change, we do not believe these are advanced enough to show on the shop-floor or to create a step change in business performance.

Issues like poor value perception linger. Many consumers still see the full price offer as bad value for money - which is why J. Crew constantly has to resort to discounting to sell products. This issue of price and value is underlined by the fact that while J. Crew’s mainstream stores suffer, J. Crew Factory stores are fairly popular with more shoppers willing to buy products at a reduced price.

Wider issues with the assortment also continue to afflict the company, with many shoppers viewing products as basic and rather unchanging. Ultimately this reduces interest and visit frequency, especially to stores. Other consumers still have issues with the quality of J Crew's clothing, which they believe has declined over recent years.

The departure of Jenna Lyons as creative director (she will serve as 'creative adviser' until December) affords J. Crew the opportunity to rethink its aesthetic and image. However, this won't happen automatically and, with respect to Lyon's replacement, Somsack Sikhounmuong, there are few prospects of it happening without major changes in design talent. Regardless of this, the question remains as to exactly how J. Crew should shift and adapt.

The same goes for Millard Drexler who will sidestep into the role of chairman in July, as Jim Brett takes up the position of CEO. This change may stimulate fresh thinking, but in the short-term, it is more likely to prove disruptive than helpful.

Overall, J, Crew is a business that appears to be financially broken, mostly thanks to its high debts. However, despite its troubles, the brand is not completely dead. It is, however, desperately struggling and now needs a team that can rekindle many of the things that once underpinned its success. With losses mounting this is a task that needs to be tackled with the utmost urgency.
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