CEO Drexler Amasses $350 Million as J. Crew Struggles

Mickey Drexler has amassed more than $350 million from the leveraged buyout of J. Crew Group Inc. even as he struggles to revive sales and restore the apparel chain’s fashion cachet.

Three years after taking the retailer private with private-equity firms TPG Capital and Leonard Green & Partners LP, J. Crew’s chief executive officer is battling slowing sales as shoppers decamp to more affordable, trendier rivals. The challenges reduce the likelihood of an initial public offering this year and make J. Crew less appealing to a potential strategic buyer such as Japan’s Fast Retailing Co.

“Mickey has done very well for himself,” said Eric Beder, the managing director of equity research at Brean Capital LLC. “But J. Crew has to reinvent itself given the prevalence of fast fashion and a customer who isn’t paying up that much for basics, which is a large part of the brand.”

Drexler invested $11 million of his own money when he was named CEO in 2003. In the 2011 buyout, his stake was worth about $301 million -- he pocketed $202 million of that and rolled the rest into an 8 percent stake, according to company filings. He also got $55 million in dividends as part of the $681.5 million J. Crew has paid the owners since going private.

In all, Drexler, 69, has accrued about $380 million since becoming CEO, including options awards, salary and bonus, according to company filings and a Bloomberg News analysis. He and his private-equity partners have recouped over half their $1.23 billion investment.

Possible Sale

In February, two people with knowledge of the matter said J. Crew was in talks about a possible sale to Fast Retailing, which owns Uniqlo. Last month, Drexler said there were no immediate plans for an IPO or sale. The bonds J. Crew sold last year to finance the dividend are indicating diminished odds that the retailer will explore a stock sale anytime soon.

J. Crew, Drexler and TPG declined to comment. Leonard Green didn’t return a phone message seeking comment.

Initially, Drexler was just what J. Crew needed. After the former Gap Inc. CEO joined in 2003, the chain quickly morphed into the go-to place for younger shoppers looking for stylish T-shirts and making investment purchases of cashmere sweaters; career women couldn’t seem to get enough of the pencil skirts and oversized blazers.

When First Lady Michelle Obama wore a J. Crew cardigan while gabbing on Jay Leno’s couch in 2008 and the first daughters donned Crewcuts, the children’s line, for President Barack Obama’s inauguration, J. Crew reaped fashion status comparable to superstars such as Ralph Lauren and Donna Karan.

Key Rationale

But by the time Drexler took the New York-based company private, it was starting to flag. A key rationale for the $3 billion buyout was giving Drexler an opportunity to work his magic again without Wall Street watching his every move.

It hasn’t happened. Though store mannequins are skillfully designed to prod shoppers into buying outfits for day and evening, there’s a sameness to the fashions, said Shaz Kahng, who advises private-equity and hedge-fund firms about retail and luxury goods. As prices have crept up, younger shoppers, once a mainstay, have fled to Uniqlo, H&M and Zara, she said.

Elleree Erdos, a 24-year-old associate at Craig F. Starr Gallery in New York, no longer gets her basics at J. Crew, as she did in college.

“Their basics are a little pricey,” she said. “And their statement pieces are just so branded that if I got a dress at J. Crew five of my friends would say, ‘So-and-so has that dress,’ and that’s not what I want in clothes.”


Creative director Jenna Lyons, a style icon who appeared on the hit HBO show “Girls” and is a walking advertisement for J. Crew, is under pressure to recapture her fashion mojo. She may be counting on the fall collection, which includes slim-fitted coats in an array of hues and wide cropped pants.

The company reported a first-quarter net loss of $30.1 million, compared with income of $29.3 million a year earlier. Revenue rose 4.9 percent to $592 million as gross margin slipped to 38.7 percent from 44.7 percent. J. Crew incurred a one-time refinancing loss of $36 million in the quarter.

Citigroup Inc. credit analyst Jenna Giannelli projects earnings before interest, taxes, depreciation and amortization of $294 million for the current fiscal year, down 21 percent from last year. If operating results continue to decline, the company said this month that it may write down the value of the business.

Boosted Debt

While J. Crew funded the first dividend with cash on hand, it boosted debt by half a billion dollars to $2.05 billion to pay the second one. Cash generation has shrunk, with free cash flow after interest falling to about $40 million in the 12 months ended May 3. The company had $128 million of working capital at the end of the first quarter and a $250 million credit line.

Like many U.S. apparel chains, J. Crew is looking abroad for growth. The company operates three stores in London, two in Hong Kong that opened in May, and 12 in Canada. In an interview in Hong Kong last month, Drexler said he’s targeting capital cities, including Paris, where the chain plans to open one or two locations by the end of 2015.

“The ambition is to go slow and do it well with great integrity, and not do it quickly and lose the quality control,” he said. “When we see the right location, we will take a shop. We’re not looking everywhere and anywhere.”

Beder said Drexler is smart to do the international push while the company is private because of the ramp-up costs. Capital spending has surged 35 percent since fiscal 2011.

Still, because J. Crew is a “uniquely driven American product, we’ll have to wait and see if it resonates with Europeans and Asians,” Beder said.

New Markets

In a statement today, a J. Crew representative said: “We are very pleased with the performance of our initial stores in both the U.K. and Hong Kong which are exceeding expectations and rivaling some of our best stores here in the U.S. We’re also excited to explore new markets in both Europe and Asia to open additional stores where we find great locations.”

On a recent Saturday afternoon, J. Crew’s store on London’s fashionable Regent Street was a quiet oasis after the crowded street; none of the checkouts was permanently staffed.

David Anthony, a 46-year-old display manager at a chain of coffee shops, was among the handful of customers browsing the store. He found a cardigan he liked but wasn’t prepared to drop 248 pounds ($420).

“Why should I pay that kind of money if I can get something not dissimilar at Zara or H&M?” he said.

(An earlier version of this story was corrected because it said J. Crew’s losses were mounting when the company lost money only in one quarter.)

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