J. Crew flounders in fashion’s shifting tides

Wendy Sherman peered into the J. Crew store at The Mall at Short Hills in New Jersey and frowned.

“It’s all really boxy. Not really flattering,” Sherman, a literary agent from nearby Livingston, N.J., said on a recent afternoon.

One mannequin jauntily wore a bright pink jacquard shell over a pair of blue ikat-patterned shorts, while another paired an oversize bright blue sweater with a blue-and-white horizontal striped skirt.

“I mean, would you wear it?” she asked.

A loyal J. Crew customer, Sherman had, nonetheless, exited the store empty-handed after picking up — and quickly putting down — a $70 shirt.

“It was cute,” she said, “but it will go on sale soon enough.”

These days, Sherman’s glum assessment pretty much sums up many of the problems facing the retailer. Boxy styles. Strange sizing. And customers who loathe paying full price when many items are either quickly discounted or can be bought online for less.

On Wednesday, the reckoning began amid reports that J. Crew was laying off 10 percent of its staff. The announcement of the reductions came just days after the J. Crew Group reported another quarter of bad news. Same-store sales for its flagship chain fell 10 percent from a year ago. Profit margins are shrinking. Because of more than $1 billion of various charges and write-downs in recent months, losses are swelling and executives are warning that things are not expected to improve anytime soon.

J. Crew executives attribute the poor performance to a few fashion faux pas, like the Tilly, a cropped sweater that was universally unloved and wound up on the sale pile.

“The Tilly was a disaster. An absolute disaster. They should not have gone that way,” said Rynetta Davis, 38, a professor at the University of Kentucky and J. Crew obsessive who recites the articles of clothing by their catalog names and posts pictures of herself wearing the chain’s outfits on her blog at jcrewismyfavstore.blogspot.com.

Just last week, as J. Crew was posting its bad numbers, the Council of Fashion Designers of America celebrated the company’s chief executive, Millard S. Drexler, honoring him with a special industry award at Lincoln Center. Called the “Merchant Prince,” Drexler, 70, known as Mickey, has seen many a leopard print come and go in more than four decades in the business.

But J. Crew’s problems run deeper than a bad sweater or two. Thanks to a leveraged buyout of J. Crew that Drexler and two private equity firms orchestrated more than four years ago, the company has $1.5 billion in debt on its books.

“He’s got all of the challenges that you get with running a troubled retail business. Now he has a troubled retail business with lots of debt,” said Howard Davidowitz, a longtime retail consultant.

J. Crew has lots of company. Abercrombie & Fitch has been hit by slumping sales, and its stock is trading at six-year lows. Same-store sales are down at Gap. Aéropostale is fighting for its survival.

Behind the downswing in fashion retailing are two trends that analysts say J. Crew either missed or is playing catch-up on.

The retailer has completely lost out on the growth in so-called athleisure wear. Retailers including Lululemon, Ann Taylor and Old Navy have introduced yoga-pants-as-weekend-wear lines. But not J. Crew.

But the bigger challenge afoot is that while J. Crew in recent years moved up in pricing, the rest of the world shifted down. The rise of fast-fashion chains like H&M and Zara has improved the quality of low-priced goods, making J. Crew’s more expensive clothes less appealing.

“We continue to have confidence in the future growth of J. Crew,” Drexler said in an emailed statement. “While our performance has not been where we want it to be, we are making the necessary fixes to our product to deliver what our customers know and love from us.”

Hale Holden, a Barclays credit analyst, who has an “overweight” rating on the company’s debt, said investors were divided on J. Crew’s future.

“It really depends on whether you believe this is a fashion cycle and that they can reimagine themselves out of it,” Holden said, “or whether they’ve created a tarnished brand and can’t get the consumer back.”

This story was originally published June 11, 2015 at 11:01 AM with the headline "J. Crew flounders in fashion’s shifting tides."