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4. What does a SWOT analysis reveal about the overall attractiveness of J. Crew’s
situation?
J. Crew’s Resource Strengths and Competitive Assets
nCEO Mickey Drexler’s track record in using diversification to resurrect specialty retail brands (Madewell,
CrewCuts, and J. Crew Weddings)
nDrexler’s strict control on brand consistency, pricing, production, and design functions
J. Crew’s Resource Weaknesses and Competitive Liabilities
nPossibly serious misstep in changing the fashion and image from ”timeless conservative” to youthful-
trendy
nSlowing growth in comparable company sales (from case Exhibit 1)
nSome loyal customers disappointed that the company has strayed from its traditional styles
J. Crew’s Market Opportunities
nOpening J. Crew stores in more geographic areas and in more countries
nGrowing sales at the company’s website
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External Threats to J. Crew’s Future Well-Being
nPrimary rivals respond to J. Crew’s entry into their “youthful-trendy” category with price cuts and/or
added features at a discount
nContinuing consumer uncertainty over the economy and regional disparities in disposable income
nSlow growth of population and potentially declining spending power of women in the 20–39 age
segment—due to massive college debt, slow job and wage growth, and changing family circumstances
Conclusions regarding the attractiveness of J. Crew’s overall situation: On balance, J. Crew’s
future outlook for growth and profitability is mixed. If, as in 2013, the Fall 2014 line turns out to be another
disappointment for CEO Drexler and Creative Director, Jenna Lyons. Lyons is known in the industry for her
fashion-forward thinking, but we do not yet know the shift to younger, trendier styles and the disappointment
of J. Crew’s traditional customers has been reversed, and even it has been, will the original customers return
5. What are the primary components of J. Crew’s value chain?
Five primary value chain components stand out:
1. Product design and styling
2. Supply chain management
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6. What are the key elements of J. Crew’s strategy?
Class members should be expected to identify the following key elements of J. Crew’s strategy:
nImpose strict control on brand consistency, pricing, production, and design functions
nLeverage brand via diversification into non-core apparel segments
• children,
nPursue domestic and (soon) international expansion of retail stores
• Using internally generated cash ows
7. Which one of the five generic competitive strategies discussed in Chapter 5 most
closely approximates the competitive approach that J. Crew is employing?
We think one of the major reasons J. Crew is at a crossroads in terms of strategy is that in trying to broaden
its primary fashion design away from conservative, traditional, “preppy” clothing into trendier fashions as
well as into other segments such as children’s apparel and weddings, it has drifted from a focused to a broad
Students might want to make arguments—pro and con—characterizing J. Crew’s current competitive
strategy approach as one of focused versus broad differentiation.
Given Drexler’s past track record of success, it appears to us that the move towards broad differentiation
may likely be supportive of a strategy to provide an exit for the private equity groups that purchased J.
1 “Mickey Drexler’s Redemption”. New York Magazine. http://nymag.com/nymetro/news/bizfinance/biz/features/10489/
index1.html
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8. What do the data in case Exhibit 1 and 2 reveal about J. Crew’s financial and operating
performance?
The tables on the next pages summarize and highlight the key income statement and balance sheet
relationships over the five fiscal years, 2009–2013.
Students should observe that, although one year’s performance does not necessarily indicate a trend, J
nSame-store sales and sales per square foot, key metrics or benchmarks for retailers, all dropped in FY
2013 (but were still slightly above where they were in FY 2010–2012):
nYear-on-year growth rates in Net revenues, Gross profit, and EBIT also declined:
• Growth in Net Revenues declined from 20.1% in FY 2012 to 9.0% in FY 2013
nMargins also declined:
• Gross margin declined from 44.3% in FY 2012 to 41.4% in FY 2013
• Operating margin declined from 11.3% in FY 2012 to 10.3% in FY 2013
nProfitability benchmarks also slid:
• Return on Assets (ROA%) declined from 2.7% in FY 2012 to 2.4% in FY 2013, and Operating
nAn important activity metric—Inventory turnover (x)—declined, from about 4.67x to about 4.02x,
• Declining Inventory turnover is a red ag for fashion retailers, who should maintain at least a
nWhile Working capital and the Working capital to sales ratio are both improving, the stresses placed on
J. Crew’s due to its ongoing high financial leverage remains a concern. Even though it operates in retail,
an industry known to be operate with low liquidity (i.e. to meet short-term debt obligations as they come
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(1)
% of Total 2011 % of Total 2010 % of Total
(2)
$3.85 $4.05 $3.69 $3.65 n/a
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TABLE 3. Financial Analysis for J. Crew, Income Statements
FY 2010–FY 2014 (Cont.)
Financial Analysis for J. Crew, Balance Sheets FY 2010–FY 2014
FYE—all amounts in $ millions) 2014
% of
Net
revenues 2013
% of
Net
revenues
ASSETS
Current Assets
Cash and cash equivalents $156.6 6.5% $68.4 3.1%
Inventories 354.0 14.6% 265.6 11.9%
Other 71.0 2.9% 77.4 3.5%
Total Current Assets 581.7 24.0% 411.4 18.5%
LIABILITIES & S/H EQUITY
Current Liabilities
Accounts Payable $237.0 9.8% $141.1 6.3%
Other 184.9 7.6% 184.6 8.3%
Total Current Liabilities 421.9 17.4% 325.7 14.6%
Financial Ratios for J. Crew FY 2013–FY 2014
2014 2013
Return on sales (%) 3.6% 4.2%
Return on assets (%) 2.4% 2.7%
Operating return on assets (%) 6.8% 7.2%
Return on equity (%) 7.4% 8.6%
Total asset turnover (x) 0.66 0.64
Calculated from case Exhibits 1 and 2.
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nThe foundational J. Crew and store segments saw severe declines in year-on-year growth rates in FY
nWhile the fastest-growing Madewell brand and Direct sales division also grew less rapidly in FY 2012–
TABLE 4. Annual Rates of Growth for J. Crew Revenue Categories,
2012, 2013
Growth Rates 2013 2012
J. Crew 7.1% 18.7%
From case Exhibit 3
Growth Rates 2013 2012
Stores 5.9% 20.8%
Direct 16.0% 19.2%
From case Exhibit 4
9. What 3–4 top priority issues do CEO Mickey Drexler and J. Crew management need to
address?
We think it is always a good idea to push the class for their assessment of what issues management needs
to address before proceeding to ask for action recommendations. Issue identification (or compilation of a
“what I’d do if I were in her/his shoes” list) is a way for students to draw conclusions from all the preceding
analyses, plus it sets the stage for what actions need to be taken.
In J. Crew’s case, we see several high-priority issues meriting priority consideration:
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10. What recommendations would you make to J. Crew CEO Mickey Drexler? At a minimum,
your recommendations should cover what to do about each of the top priority issues
identified in question 9.
Students should be pressed to offer practical action recommendations to address the issues identified in the
prior question.
In our view, most all of the front-burner issues at J. Crew relate to the inextricable linkage between its
The case intimated that management had already begun to repair the damage to its brand by returning to its
The following recommendations seem to us to be on target and actions that students should propose as part
of J. Crew’s strategy in upcoming years:
nCompletely re-think the move to a broad differentiation strategy: straying very far from designing and
marketing apparel items that are not supportive of the conservative/traditional image not only places J.
nRe-build consumer trust in the J. Crew brand and enhance the company’s brand reputation by:
• Offering free replacement products or full refund guarantees on all apparel products
• Making shopping at J. Crew stores a distinctive, pleasant, pampered, and fun experience.
nContinue to expand as rapidly as internally generated funds will permit
• There seems to be some opportunity to continue to open the majority of the company’s new retail
• However, there is increasingly less room in the U.S. market for new J. Crew stores than one might
• If J. Crew should pursue U.S. expansion, the focus should be on the lower-price Madewell and
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• Also, the more stores that J. Crew operates in the U.S. market, the more difficult it may be to find
additional locations where new stores, at an average approximate cost of about $2+ million per
store, can generate annual sales of at least $1.6 million-plus per store (the average in FY 2013).
• Instead, from an ROI perspective, it seems more prudent to invest in growing the direct-to-consumer
line of business with continued catalog support but directing customers to the J. Crew website and
• We suspect that expansion into Asia—where disposable incomes are growing—should carry a
• The case does not provide sufficient information for students to offer well-supported recommendations
about which Asian countries or even European countries should carry the highest priority for
expansion. But because of the logistics costs of supplying foreign store locations with J. Crew’s
products and high initial promotional costs of introducing customers to the J. Crew brand, we
• Make it a priority to open stores in major metropolitan areas in China, beginning with Hong Kong,
nContinue to use contract manufacturers to produce apparel, but gradually reduce reliance on agents/
dealers to reduce the Cost of goods sold.
nSeek ways to build the potentially highly profitable J. Crew Wedding line of business but solely via
nSeek external funds via sale of the company in a public stock offering (initial public offering or IPO) or
via merger with another specialty retailer, one presumably attempting to broaden its product portfolio to
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Wrapping Up the Class
The J. Crew case can provide instructors with an important “bridge” to strategy execution concepts covered in
later chapters, so we would encourage you to conclude by foreshadowing the material in those chapters and by
making the following points:
nCompanies like J. Crew need to establish investment priorities that focus resources on the most attractive
business units: (This will be covered in Chapter 8)
• Initiate profit improvement/turnaround strategies in weak-performing businesses that have potential
nCEO Drexler needs to weigh among possible implementation steps to boost the combined performance of J.
Crew’s collection of businesses: (This will also be covered in Chapter 8)
• Sticking closely with an existing business lineup and pursuing opportunities presented by these
businesses
nThis company is a reasonably good example of why good strategy execution requires continuously building
and upgrading an organization’s resources and capabilities: (This will be covered in Chapter 10)
• Superior strategy execution capabilities will enable J. Crew to react more quickly to market changes and
beat other firms to the market with new products and services
Epilogue
On September 4, 2014, the Wall Street Journal reported that J. Crew Group’s second-quarter profit fell 38% as
the privately held retailer posted higher revenue amid increased expenses. Same-store sales rose 4%.
For the quarter ended Aug. 2, the company posted a profit of $10.8 million, compared with net of $17.5 million
a year earlier. Revenue rose 12% to $627.2 million. The company saw an increase in the cost of goods sold as
well as in general and administrative expenses.
“J. Crew and Japan’s Fast Retailing Co. held merger discussions but the talks broke down earlier this year,”
people familiar with the matter said at the time. Goldman Sachs Group Inc. has also done work for J. Crew on a
potential initial public offering.
As it did in the first quarter, the company noted the possibility that it may write down the value of its retail-store
operations, depending on operating results.
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As of September 2014, company operated 271 J. Crew stores, 76 Madewell locations and 131 factory stores, for
a total of 478 stores, up from 451 stores at the end of FY2013. Of note, J. Crew opened two stores in Hong Kong
in May 2014, marking the retailer’s return to Asia after it pulled out of Japan in 2008.
A summary of J. Crew Group’s financial performance for the first two quarters of fiscal 2014 is presented in
Table 5.
TABLE 5. Financial Summary for J. Crew Group, First and Second Quarters
FY 2014, FY 2013
Thirteen
Weeks
Ended
2-Aug-14
Thirteen
Weeks
Ended
3-Aug-13
Thirteen
Weeks
Ended
3-May-14
Thirteen
Weeks
Ended
4-May-13
Revenues
Net sales $617,130 $550,946 $583,384 $556,354
Other 10,099 8,156 8,585 7,758
Total revenues 627,229 559,102 591,969 564,112
Cost of goods sold, including buying
and occupancy costs 390,549 329,110 362,786 312,097
Gross profit 236,680 229,992 229,183 252,015
Selling, general and administrative expenses 200,667 174,226 195,165 178,397
Income from operations 36,013 55,766 34,018 73,618
Interest expense, net of interest income 17,757 26,239 21,661 25,681
Loss on refinancing 58,786
Income before income taxes 18,256 29,527 (46,429) 47,937
Provision for income taxes 7,471 12,069 (16,311) 18,617
Net income 10,785 17,458 (30,118) 29,320
Other comprehensive income (loss)
Reclassification of losses on cash flow hedges, net
of tax, to earnings — 2,132 13,652 1,003
Unrealized gain on cash flow hedges, net of tax — 528 (766)
Foreign currency translation adjustments (223) (731) 1,285 (246)
Comprehensive income $10,562 $19,387 $(15,181) $29,311
Source: “J. Crew Group Announces Second Quarter 2014 Results,” PR Newswire, September 4, 2014.