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J.Crew’s Drexler bets on Madewell, outlets, and overseas to fix business

A customer walks into a clothing retailer J.Crew store in Manhattan, New YorkA customer walks into a clothing retailer J.Crew store in Manhattan, New York
A customer walks into a J.Crew store in New York.Photograph by Mike Segar — Reuters

J.Crew had an annus horribilis in 2014, with its namesake brand coming in for a particularly bad beating as women stayed away in droves.

But the fashion brand was unusually candid on its earnings call on Wednesday, and laid out a plan for getting out of its funk, putting emphasis on J.Crew’s outlet stores, its Madewell stores, international expansion, and, it hopes, better fashion for women.

Most worrisome for J. Crew in 2014 was that its performance got progressively worse over the course of the year, culminating in a sales decline of 3% during the key holiday quarter. The biggest culprit? Dull women’s fashions that the company had to clear out at bargain basement prices. By the holiday quarter, J. Crew’s gross margin rate had fallen to 34.5%, not that far above that of a discount retailer like Target (TGT) and certainly far from what a specialty store like J.Crew can command.

“Needless to say, it’s been a tough year for us and the numbers speak to that. First and foremost, I and our team own that,” CEO Mickey Drexler said on Wednesday’s conference call. “The (retail) world was hugely promotional, giving goods away.”

The deterioration was so bad in J.Crew’s stores that the company took a massive $562 million write-down in 2015 to reflect that the brand has lost much of its value. Here are some of the key components of Drexler’s plan to fix J.Crew in 2015.

1. Expanding the Madewell chain.

In 2006, J.Crew launched Madewell, a modern-day version of an American denim label founded in 1937. That brand’s stores are known for their antique décor and hip vibe, and they’ve been a big hit. For Drexler, those stores are also a major source of growth: in 2014, Madewell’s sales rose 35% (with comparable sales, which strip out the effect of newly opened or closed stores, rising 14%). So Drexler plans to open 20 more this year (adding to the current fleet of 85), bringing Madewell past the 100-store count.

2. More J.Crew discount outlet stores.

Like other brands, such as Coach (COH) and Michael Kors (KORS), J.Crew gets a big windfall from its factory outlets, stores that sell J.Crew fashions at much lower prices (and arguably, lower quality). So while it may seem paradoxical to hear Drexler bemoan how promotional retail is at the same time as he plans to open more outlet stores, that is just what he’s doing: J.Crew will add 21 outlets to its current fleet of 139 discount locations this year.

Drexler dismissed the idea that the outlet stores cannibalize the regular J.Crew stores, saying there was little overlap between the chains’ clienteles.

3. More international stores.

J.Crew has been deliberate about its international expansion plans, cognizant of the risks of opening too many stores in countries where it is not well known, as amply evidenced by the botched European expansion of Abercrombie & Fitch’s (ANF) Hollister brand.

It recently opened its first Paris store and is planning its sixth London store. J.Crew opened its first international store in Toronto in 2011. In 2015, J.Crew will pick up the pace a bit with six new international stores, on top of the 14 it already has (six in Canada, five in the U.K., two in Hong Kong, and one in France.)

Drexler sees a ton of opportunity abroad, but notes that a big-scale international expansion is not in the offing. With J.Crew’s e-commerce site able to serve customers in 120 countries, he doesn’t need to.

4. Fixing women’s fashions.

Drexler has long been credited for turning Gap (GPS) into a powerhouse when he was CEO there in the 1990s. But even a master can hit a funk. The single biggest reason for J.Crew’s current woes is that its fashion line for women has failed to catch on. In contrast, J.Crew’s men’s business has been humming along, thanks to the enduring popularity of its Ludlow and Crosby suits.

The problem is that J.Crew has strayed too far from its classic women’s fashions. And so flourishes of more color this year aside, J.Crew’s women’s wear will be closer to what it has traditionally offered.

“We’re getting back to who we are in a much quicker way,” Drexler said. But, he added, “Fashion is guaranteed to never always be right.” But this year, Drexler needs J.Crew fashion to be right: the company can ill afford another year with a net loss of $657.8 million (on revenue of $2.3 billion) caused by massive discounting of fashions customers don’t want.

“She’s loyal as hell until we go wrong,” Drexler said, referring to its female customers. “Then she wants it on sale.”