Source: J.Crew via Bloomberg

Inside Mercantile, J. Crew's Bet on Cheaper Clothes

CEO Mickey Drexler tries something fresh to pull the retailer out of a sales rut

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. Few decorations adorned the walls. One table offered up free chocolate chip cookies and tiny bottles of San Pellegrino sparkling water.

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% OFF THE TICKET PRICE.

THE WINNIE PANT 40% OFF.  

After all, this isn't 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's 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 says 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.

J. Crew Mercantile's first store, in Dallas.
J. Crew Mercantile's first store, in Dallas.
Source: J.Crew via Bloomberg

The company is rapidly losing its identity, says Robin Lewis, retail consultant and CEO of the Robin Report, an industry newsletter, 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 says.

"What's the real J. Crew product?" Lewis says. "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 may be straying too far from what made it successful in the first place—high-quality, classic clothes—and now it's further distracting itself with another low-price business, says Jenna Giannelli, an analyst at Citigroup. If J.Crew's product isn't on its game, customers will go somewhere else. "A fashion miss exacerbated the problem, but the store rollout and the shift away from traditional fashion are eating into their wheelhouse," she says.

The new shop's opening day comes at a time of peril for J. Crew. Rumors swirled about a potential initial public offering in 2014, but that chance vanished as sales tanked. A year marred by fashion failures and strategic errors left executives scrambling to patch things up as the company squirms beneath a $1.5 billion pile of debt. Sales at J. Crew brand stores open at least a year dropped 10 percent last quarter, worse than the 3 percent slip the year before.

Off-price J. Crew product isn't 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 increase, as J. Crew says it plans to open 21 Factory stores this year, and it set an annual square-footage growth target of about 10 percent for the outlet brand. Customers who don't live near a Factory location have had access to the product online since the standalone website was launched in late 2012.

It's not an unreasonable ambition. Retailers are pushing outlet stores because they're seeing high returns, Hale Holden, an analyst at Barclays Capital, says. 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. "In this case, it's one store. We'll see how far they expand it, and we have to trust them a little," says Holden. "You're just taking product you already made and moving it to a more Main Street location."

On a March conference call, Drexler said cannibalization between Factory and J. Crew is minimal. Customers who shop Factory might never have bought anything from J. Crew anyway, because of the prices. Either way, they're 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," Drexler said on the call. "And that's a bigger concern for every mall player."

The men's section at J. Crew Mercantile in Dallas.
The men's section at J. Crew Mercantile in Dallas.
Source: J.Crew via Bloomberg

It's 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. Sales at the J. Crew brand fell 5.2 percent in the first quarter from a year earlier, and the chain has had to slash prices to clear out inventory. Promotions run wild as J. Crew jockeys for position with mall-based competitors that are piling on the discounts. In June, the company announced it would eliminate 175 jobs, mostly at its corporate headquarters in New York. Drexler called 2014 a "lousy year" for his women's business. 

“Fashion is guaranteed never to always be right,” he said. “That’s the only guarantee in my many years of doing this." 

Drexler sits at the heart of it all. 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's especially concerning, then, that J. Crew's problems have a lot to do with the merchandise. 

Now Drexler and his lieutenants are trying to make the fashion right. Last month he named Somsack Sikhounmuong head of women's design at the flagship brand. Previously, Sikhounmuong led design for Madewell, J.Crew's smaller sister label. With its array of casual women's clothes that emphasize fit and comfort, Madewell is a bright spot for the struggling company, with sales surging 33 percent in the first quarter from a year earlier. Introduced in 2006, Madewell boasts a fleet of about 88 stores and a partnership to sell items at upscale department store Nordstrom.

Where does Mercantile fit in? Customers visiting the Dallas shop on Wednesday noted how convenient it was compared with the outlet mall. Kim Daugherty, 42, who works in design, says the store is much closer to her home than the nearest J. Crew Factory outlet in the suburbs. Another customer, 42-year-old March Baremore, who works in sales, calls the store "really, really nice," and appreciates its size; it is bigger than the Factory store she frequents. Baremore says she won't pay regular mall store prices for J. Crew, limiting herself to the off-price shops.

Sarah Dickson, a 25-year-old nurse, was the first customer to leave the J. Crew Mercantile store toting a J. Crew shopping bag. Though she did dish out $20 for a bracelet, she came away unimpressed.

"I wasn't blown away," Dickson says of her 15-minute visit. "It's not that different than the Factory store. I thought it was going to be something more exciting." 

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