J. Crew bets on cheaper clothes

J. Crew's sales have fallen because of unappealing styles and fit.
J. Crew's sales have fallen because of unappealing styles and fit.PHOTO: NEW YORK TIMES

New Mercantile stores offering big discounts for similar merchandise can confuse customers, say analysts

TEXAS • J. Crew's new Mercantile store, nestled in an open-air mall in Dallas, opened this week to little fanfare. Inside, a small but steady flow of shoppers poked through displays of skirts, jeans, and sunglasses.

The shoppers were here for the savings, though, and black-and- white signs touted big sales throughout the store.

"Take $25 off every pair of jeans." "Belts take 40 per cent off the ticket price." "The Winnie pant 40 per cent off."  

After all, this is not J. Crew proper. This is its cheaper cousin.

Mercantile is, in essence, the same as J. Crew Factory, the company's existing chain of outlet stores. They carry the same merchandise and share the same e-commerce website. But unlike the outlet stores, often clustered in faraway outlet malls, J. Crew Mercantile's locations will be at more traditional shopping locales closer to residential areas.

It is clear that the Dallas shop is merely the first in a broader initiative. The Mercantile website promises "additional locations coming soon". An internal memo leaked to BuzzFeed said J. Crew will open 10 Mercantile stores this year, "with future expansion plans into 2016".

Chief executive Mickey Drexler's exact plans for Mercantile remain shrouded in mystery. A representative for J. Crew declined to comment on Mercantile's future or make executives available for interviews. But industry observers say the initiative shows that J. Crew is devoted to expanding its off-price lines, a move they worry could dilute and possibly damage its brand with cheaper products.

The company is rapidly losing its identity, said Mr Robin Lewis, retail consultant and CEO of industry newsletter The Robin Report, and Mercantile could further confuse customers. What began as a merchandise problem has extended through the whole brand, a problem that requires an immediate remedy, he said.

"What's the real J. Crew product?" he said. "And what's the real J. Crew price? You've got three things here: J. Crew stores, factory outlets and Mercantile. Who am I supposed to believe?"

J. Crew is straying too far from what made it successful in the first place - high-quality, classic clothes - and now it is further distracting itself with another low-price business, said Ms Jenna Giannelli, an analyst at Citigroup.

If J.Crew's product is not on its game, customers will go somewhere else.

The new shop's opening day comes at a time of peril for J. Crew. A year marred by fashion failures and strategic errors left executives scrambling to patch things up as the company squirms beneath a US$1.5-billion (S$2-billion) pile of debt. Sales at J. Crew brand stores open at least a year dropped 10 per cent last quarter, worse than the 3 per cent slip the year before.

Off-price J. Crew product is not hard to come by. As of May, there was about one Factory store for every two locations under the flagship banner - 142 Factory shops in all. That number is likely to grow, as J. Crew said it plans to open 21 Factory stores this year. It is not an unreasonable ambition. Retailers are pushing outlet stores because they are seeing high returns, Mr Hale Holden, an analyst at Barclays Capital, said.

J. Crew remains in an experimental phase as it figures out ways to expand its lower-priced offerings, trying to sell outlet items in a regular mall. During a March conference call, Mr Drexler said cannibalisation between Factory and J. Crew is minimal. Customers who shop Factory might never have bought anything out of J. Crew anyway, because of the prices. Either way, they are coming to one of the company's stores. "It's a net gain, and we're not concerned, but there is a concern on mall traffic in general," Mr Drexler said on the call. "And that's a bigger concern for every mall player."

It has been a tough run for J. Crew since the 2013 holiday season. Its women's business has been plagued by fashion issues, from unappealing silhouettes and fits to flubbing the classic styles it was once known for.

Mr Drexler called 2014 a "lousy year" for his women's business.

Lauded as the "merchant prince" for his knack for picking out styles that sell well, the well-respected executive earned his reputation leading Gap's growth through the 1990s, including the creation of that retailer's biggest brand, Old Navy. It is especially of concern, then, that J. Crew's problems have a lot to do with the merchandise. 

Now Mr Drexler and his lieutenants are trying to make the fashion right. Last month, he named Mr Somsack Sikhounmuong head of women's design at the flagship brand.

Previously, Mr Sikhounmuong led design for Madewell, J.Crew's smaller sister label. With its array of casual women's clothes that emphasise fit and comfort, Madewell is a bright spot for the struggling company, with sales surging 33 per cent in the first quarter from a year earlier.

Introduced in 2006, it boasts a fleet of about 88 stores and a partnership to sell items at upscale department store Nordstrom.

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A version of this article appeared in the print edition of The Straits Times on July 30, 2015, with the headline 'J. Crew bets on cheaper clothes'. Print Edition | Subscribe