J.Crew's `Edgy' Basics Merit Outperform Rating, Champine Says: Tom Keene

J. Crew Group Inc. will continue to build its brand’s premium by avoiding discounting and providing basics with a fashion edge, according to Laura Champine, an analyst at Cowen & Co.

“They do a fine job of walking the line between what’s too edgy, but if you really look at the clothes on a standalone basis, they’re pretty basic,” Champine said in a radio interview today with Tom Keene on “Bloomberg Surveillance.” The retailer’s shift toward higher-end is partially because the apparel purveyor is “not being nearly as promotional as a lot of other brands. That move into more fashionable product helps them keep that brand premium.”

Cowen reiterated its “outperform” rating on J. Crew’s stock on Sept. 7, largely in anticipation of growth from Madewell, J. Crew’s chain that sells casual women’s clothing at prices 20 percent to 30 percent lower than its parent.

In July, store sales missed analysts’ estimates as consumers restricted spending ahead of the back-to-school season. The retailing season was “OK,” according to Champine, who is in New York.

“It met tempered expectations -- not a home run by any stretch, but not a disaster,” she said. “We’d love to see more growth. We’re really not getting it, but it doesn’t look like we’re taking another leg down.”

The shares of the company sank last month after Chief Executive Officer Mickey Drexler cut the company’s 2010 profit forecast after shoppers slowed their spending in July. Still, Drexler, who built Gap Inc. into a global brand, has “learned his lesson” about a store’s ubiquity, according to Champine.

‘Carefully Expanding’

“They’ve done a very good job of carefully expanding, not over-expanding, in the retail market and a fabulous job of marketing online,” she said. Thirty percent of sales go through their online store, according to Champine.

Consumer confidence also slumped in July, according to a University of Michigan survey. Consumer spending in the U.S. rose more than forecast in July, exceeding gains in incomes, Commerce Department figures in Washington showed Aug. 30. Purchases rose 0.4 percent, the most since March, after little change the prior month. Incomes climbed 0.2 percent, less than projected, and the savings rate dropped.

Third-quarter profit for J. Crew, which operates only in the U.S., will be $2.25 to $2.35 a share, the New York-based retailer said in an Aug. 26 statement, compared with a forecast in May of as much as $2.45. The company expects third-quarter earnings of as much as 60 cents a share, which is higher than 52 cents a share in the second quarter and falls short of analysts’ projections.

Fashion’s Night Out

Jenna Lyons, executive creative director at J. Crew, will be at the Prince Street location in Manhattan tomorrow for Fashion’s Night Out, designed to support retailers in all five New York boroughs. About 1,100 stores will remain open until 11 p.m. as part of Fashion’s Night Out, up from 800 participants last year, according to Tiffany Townsend of NYC & Co.

J. Crew shares climbed as much as 1.9 percent to $35.20, the highest in a month, at 1:13 p.m. in New York. The stock has slumped 23 percent this year.

To contact the reporters on this story: Mary Childs in New York at mchilds5@bloomberg.net; Tom Keene in New York at tkeene@bloomberg.net

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