Mickey Drexler transformed J. Crew into an upscale fashion retailer whose goods are coveted by no less than Michelle Obama. But as he visited stores last year, he began to get worried.
Customers were complaining that his stores no longer carried the "cafe Capri" women's cropped pants. The shelves were stocked with too many ruffled tops and mini-skirts, and too few classics such as Italian cashmere sweaters, ballet flats and knee-length pencil skirts.
Mr. Drexler felt the pain. The missteps caused J. Crew Group Inc. to stumble financially. Today, as he prepares for the retailer's first foray outside of the U.S. with the August launch of a store in Canada – a test for an international expansion – he feels the pressure to once again generate the fashion hits for which he is famous.
"We skewed a little younger than we should have – a little more trendy," Mr. Drexler, J. Crew's chief executive officer, said in an interview, sporting his trademark 484 slim-fitting jeans and untucked,button-down Thomas Mason shirt. "We ran out of a lot of our best-sellers. When you don't have enough of the best, you skew too young – you have a tough time. It happened. Right now it's kind of fixed."
It's more urgent than ever that Mr. Drexler, 66, repairs the problem. His international plans are ambitious. He intends to build about 20 stores in Canada, and his J. Crew team is checking out locations in Asia and beyond while mapping out an aggressive expansion of their global e-commerce group.
In Canada, he is gambling that J. Crew will cash in on the halo effect of the U.S. First Lady and other celebrities being spotted in its garments. At the same time, he faces a growing array of foreign retailers, from Spain's Zara to the American chain Forever 21, rapidly adding stores here.
"Drexler is human and obviously made some mistakes last year," said Mark Cohen, a professor at the Columbia University Graduate School of Business in New York and a former CEO of Sears Canada. "The good news about a one-man band is that, when in tune, the melody is awfully sweet. But when it's off-key, the music is awful. He needs to remain as laser-focused on [fashion] trends as is Zara, for example, if his expansion plans are to succeed."
J. Crew's latest results show how critical it is that Mr. Drexler stay in tune. In its first quarter ended April 30, the retailer posted a loss of $29.9-million (U.S.) compared with a $44.7-million profit a year earlier. Much of the loss was tied to costs of a takeover: Two investment firms took J. Crew private in March for almost $3-billion.
But the company was also squeezed by heavy discounting to clear out inventories. Revenues dropped 1 per cent to $409.5-million while sales at stores open a year or more, a key retail measure, fell 3 per cent.
The prospects aren't much better for the second quarter, although company executives predict that the business will perk up in the second half of the year as the fixes take hold.
"Given the continued weakness in J. Crew's sales and gross margin trends … we're guessing that some prior shareholders may be feeling a bit lucky to have taken the money and run," said Samantha Panella, an analyst at Raymond James in New York.
Despite those recent results, the Drexler era has been a good one for the New York-based company. Since his arrival in 2003, revenues more than doubled to $1.7-billion, while a string of losses turned into profit. The company earned $121.5-million last year.
J. Crew's recent fashion errors underline Mr. Drexler's strengths and challenges. He knew quickly last summer that some of the new younger styles weren't working, and that the stores were under-stocked on classics.
He keeps a close eye on customer demand, visiting stores regularly, replying promptly to customer emails and picking up on merchandise wins and lapses. But correcting the errors doesn't come easily – it can take six to nine months for J. Crew to ship the right products from overseas manufacturers to stores.
"When the goods are in the store that day – you know if you make a mistake," he said. "We heard it from Day One: The skirts were too short. And you know something? The customer is always right. They vote with their pocketbooks."
Mr. Drexler earned the title of Merchant Prince among Wall Street analysts in the 1990s after remaking the Gap into a worldwide fashion retail powerhouse that clothed a generation in khakis and casual Friday chic. But in 2002, he was fired as CEO after the company faltered, having over-expanded and shifted to overly trendy styles.
A year later, J. Crew hired him to spearhead a much-needed turnaround of the preppy retailer. Started as a mail-order business in 1983, it had been drifting for years. He shifted it up-market and gave it flair with eye-catching linings and trims. He added specialty chains Madewell for hip denim wear and Crewcuts for children's fashions.
But Mr. Drexler said he has learned from his Gap mistakes. At J. Crew, he has been cautious in expanding: It now has about 340 stores compared with about 3,200 at Gap, which is still struggling today. He has moved slowly in new initiatives at Madewell, Crewcuts, men's-only stores and a bridal boutique.
Prof. Cohen thinks there are few parallels between Gap's overexpansion and the international growth that Mr. Drexler is now plotting. "J. Crew is a much smaller, more graceful and nimble retailer which is not in any way caught up in the apparel commodity wars that the Gap finds itself in," Prof. Cohen said. "I think their brand of slightly edgy classicism will resonate well in Canada."
Heather Reisman, CEO of Toronto-based Indigo Books & Music, also thinks the Drexler magic will prevail. She sat on the board of directors of J. Crew until it went private, and provided him with insights into Canada. "My sense is that there is a lot of pent up demand for them to be here," she said.
Mr. Drexler shuns traditional research and instead leans on customer feedback – including from Ms. Reisman – and "the amazing 'please open up a store in Toronto' requests we get," he said. "We've done research. You know what that is? Us going there, us hanging around there, us knowing we have a large base of Canadian customers [for its online store]. We know [Canadians] are as fashionable as any customers anywhere in the world. So that's our research."
Even so, within two weeks of the first store opening in Canada, he will have further insights, he added.
J.Crew's first store in this country will be a women's-only store at Toronto's Yorkdale Shopping Centre, one of Canada's top malls. Because the space is not big enough for men's wear, he's looking for another location in the mall for a men's-only store. J.Crew is also eyeing a larger outlet at the downtown Toronto Eaton Centre, and would like to find a location on the city's so-called Mink Mile if the lease isn't too expensive.
"The last thing you want to do is pick a wrong location," he said. "If you have the wrong merchandise, you can move it out [relatively] quickly if you make a mistake. If you have a wrong location, you live with it for many years, and that's no fun."
He takes cues from technology giant Apple, on whose board of directors he sits and whose founder, Steve Jobs, is one of his many celebrity connections.
From Apple he's had engrained in him the imperative of great style and product. And like Apple's leader, Mr. Drexler places a priority on controlling distribution of his products by designing and having them made just for his company, so that a rival retailer can't sell the exact same item at a lower price.
An equally pressing concern is keeping an eye on weakening trends in consumer spending and rising inflation. He thinks J. Crew can position itself as a retailer that sells affordable luxury. "I'm concerned about the overall economy, for sure," Mr. Drexler said.
"The world is hugely competitive – you don't need another store anywhere in the world these days," he acknowledged. "And it's a slower-growth world … I'm not an economist, but we see the customer. People are a lot more value sensitive. We think it's an opportunity for us."