When Millard “Mickey” Drexler joined J. Crew as CEO in 2003, he had something to prove.
After 20 years, he was fired from The Gap following two years of consecutive monthly declines a year before he joined J. Crew, and he needed a comeback that would secure his legacy as the Merchant Prince, a nickname he earned for transforming The Gap in its golden years.
But Drexler couldn’t do it alone, because for all his storied abilities as a retailer and merchandiser, he was not a designer. That’s where Jenna Lyons came in. Lyons, who had been with J. Crew since graduating from Parsons School of Design in 1990, gave Drexler the one thing he needed but couldn’t buy: the cool factor. As one former employee told Fast Company in an April 2013 profile of Lyons, “Mickey wants to be so cool so bad. Jenna is confident and cool and human and comfortable with herself and gives him the credibility he needs to be on fire.”
For a decade, the pair ruled American fashion with cashmere fists. Lyons was promoted from designer to creative director. Editors fawned over J. Crew’s collections. Customers ate up the company’s colorful shoes, pencil skirts, patterned fabrics and slim-cut ankle-baring pants (for men and women!), essentially a look that recreated Lyons’ own style.
But fashion is fickle, and by 2015, comparable sales slumped 8.2% in the year as Drexler blamed J. Crew’s problems on cardigans and quality issues, and vowed to bring the brand’s beloved basics back. That never happened, and Lyons slipped further into her own brightly-hued fever dream of expensive and unsellable fashions that consumers steadily turned away from. “At J. Crew, it was the Mickey and Jenna show, and Mickey said that the reason they weren’t doing well is that they picked the wrong cardigan,” Mark Cohen, director of Retail Studies at Columbia Business School and former CEO of Sears Canada, told Retail Dive. “But it was a lot more than a cardigan. It was that the J. Crew core customer had been rejecting the brand for the last four years.”
At the same time, the company, which declined to comment to Retail Dive for this story, was bloated with hundreds of retail locations it was loathe to shutter. Declining mall traffic took a further toll on its earnings, and amidst bad publicity over layoffs, J. Crew amassed over $2 billion in debt.
Losing the core J. Crew customer
There’s nothing the American public relishes more than a good comeback story – except for a good fall from grace.
By April 2017, when Lyons announced her departure (followed shortly by menswear designer Frank Muytjens), pundits such as The New Yorker’s Joshua Rothman were almost gleeful in their opinion pieces about why J. Crew was doomed from the get-go.
Two months later, when Drexler announced that he was stepping down as CEO and former West Elm CEO James Brett would take his place mid-July, the fashion industry was both surprised and unfazed. He’d recently fallen on his sword in an interview with The Wall Street Journal at the end of May, when the 72-year-old admitted he hadn’t anticipated the changes technology would wreak on retail while again insisting the company would return to fashion basics.
“J. Crew made a gamble on upscale millennials by moving away from ‘preppy basics,’ which had been their brand cachet, and carrying more premium merchandise. This move backfired, and alienated their core consumers.".
Principal in the retail practice of A.T. Kearney
For J. Crew, its multiple missteps may have simply been a question of bad timing, according to analysts.
“J. Crew faced a perfect storm as it was beginning to go upscale in 2011 and 2012,” Manik Aryapadi, principal in the retail practice of A.T. Kearney, a global strategy and management consulting firm, told Retail Dive, explaining that the company was blindsided by three main factors: evolving consumer shopping trends; the lingering effects of the recession; and the rise of athleisure.
“J. Crew made a gamble on upscale millennials by moving away from ‘preppy basics,’ which had been their brand cachet, and carrying more premium merchandise,” Aryapadi said. “This move backfired, and alienated their core consumers. Success of brands like Vineyard Vines shows that there is still an appetite and a market for this strategy. J. Crew needs to rediscover its roots and focus on its core strengths.”
The recession also played its part, Aryapadi said, making J. Crew’s move to upscale fashions seem counter-intuitive at best, and tone-deaf at worst. “As J. Crew was trying to go upscale, its core consumers were facing a financial pinch, so there was a mismatch between merchandise carried by J. Crew, both in assortment and pricing, and consumer expectations,” he said. “This problem was further exacerbated by J. Crew’s erratic pricing strategy, with uneven promotions and discounts that further devalued their brand in the eyes of the consumer.”
Then too, the company missed the mark on athleisure and the casualization of the office place. “Their collaboration with New Balance might help,” he said. “But it may be too late to the game.”
The Drexler problem
All of these issues — discounting, changing consumer dynamics, missed fashion moments — are the result of top-down decisions, which means the question of what went wrong is both incredibly simple and remarkably intractable.
“This is all Mickey’s fault,” Cohen said bluntly. “Mickey is a brilliant merchant, but not a brilliant manager. At The Gap he created Old Navy, and it was fabulous, and then somehow it started to compete with The Gap. And then Gap’s quality got traded down to Old Navy. Fast-forward 20 years, and you have something similar happening with Madewell. The J. Crew quality went down, the prices went up and J. Crew moved away from its core customer — and when you do that you get killed.”
With the rise of technology, such as smartphones and smart assistants, as well as supply chain advancements such as next day delivery, the entire nature of buying and selling changed dramatically, whereas Drexler’s approach did not.
"The J. Crew quality went down, the prices went up and J. Crew moved away from its core customer — and when you do that you get killed."
Director of Retail Studies at Columbia Business School
That’s not to say Drexler doesn’t have experience with turnarounds. Over the past 40 years, Drexler has pivoted several brands with a mixed record, Aryapadi said.
“His marketing campaign at Gap on khakis is still widely remembered as one of the best ever in the industry, and he is rightly referred to as ‘the Prince of Merchants.’ However, what worked in the past few decades will no longer work today. We live in a different era, with the ever creeping influence of technology and a trend towards personalization and authenticity.”
Drexler’s underestimation of Amazon — and the lessons that could be could gleaned from its business model — wasn’t his biggest shortcoming, certainly, but it was one of his most impactful mistakes. Like many retailers in similar positions, J. Crew found itself in the shadow of Amazon’s hulking online presence, and was ill-equipped to compete, both technologically and nimbly from a supply chain perspective. And while Amazon famously did not begin posting regular profits until 2015, J. Crew was not so flexible in its ability to float by without cash. The company began borrowing in earnest, and dug itself into a hole it could not easily climb out of.
The debt question
The combination of fashion failures, technology misses and retail expansions led, unsurprisingly, to J. Crew’s current $2 billion debt problem. Even with help from its lenders, Aryapadi said the deadline to pay off its debt is fast approaching, with no clear path toward solvency.
“While GSO’s acquisition of J. Crew’s debt has given the retailer a lifeline — for now —it would be difficult to pay off these bonds by 2019, when they come due,” he said. “However, it is possible that there could be some negotiation delaying the bond payments and giving J. Crew more time to implement a turnaround. The current leadership change sends a strong signal to creditors that J. Crew is dead serious about a turnaround.”
The company on Monday officially announced plans to restructure its debt through a debt swap to exchange any and all of the outstanding $566.5 million aggregate principal amount of 7.75%/8.50% senior pay-in-kind notes due in 2019 for an equity stake and bonds that mature in 2021. The company has asked its term-loan lenders to dismiss, with prejudice, litigation relating to the assignment of its intellectual property rights, which J. Crew late last year attempted to shield by transferring them to an unrestricted Cayman Islands subsidiary.
“Even if earnings grow by 20% or 30% over the next few years, there’s still too much debt,” Raya Sokolyanska, VP and senior analyst at Moody’s Investors Service and lead analyst for J. Crew, told Retail Dive. “Some kind of debt transaction needs to happen to make the capital structure sustainable. Leverage is at 11 times today, and in the current retail environment we think J. Crew is unlikely to get enough earnings growth to bring it down to a more sustainable 6 to 7 times.”
“Even if earnings grow by 20% or 30% over the next few years, there’s still too much debt.”
VP and senior analyst at Moody’s Investors Service
The company has attempted to extend the nearest maturity date of its debt from 2019 to 2021 and reduce its total debt in a deal that pits its secured lenders against the unsecured deeply subordinated lenders. J. Crew offered its unsecured lenders (that own the piece of debt due in 2019) the option to swap into a smaller but more attractive piece of debt due in 2021, which would be backed by intellectual property rights to the J. Crew brand name. The problem is that this intellectual property (assessed at $250 million) is an important asset that used to serve as collateral for the secured lenders. J. Crew moved the IP to an unrestricted subsidiary in order to get around credit agreement restrictions, and claims the move was legally allowed. However, the secured lenders are suing the company and claiming the IP transfer was an event of default. J. Crew is countersuing to establish the legitimacy of the move, to clear the way to get the debt swap done.
Yet for all the litigation and hand-wringing, the money problem could be somewhat ameliorated if incoming CEO Brett can inspire real confidence from J. Crew’s lenders. “The new CEO has to convince the financial community that he can fix the business,” Cohen said. “This isn’t that big a ship. For all the yabba dabba doo about this, it’s not that big. It’s $2 billion, and it’s a monobrand, and so it’s manageable.”
Steering a transformation
As the struggling retailer looks to restructure its debt and pivot its business model, Drexler will step back and hand over the steering wheel to Brett, but analysts warn that Drexler will likely be a backseat driver.
Drexler’s mentor role moving forward hasn’t been defined, even loosely, and Cohen said he doubts Drexler will let go altogether. At least not right away. “How they remediate the debt is a big unknown, and I don’t think they can fix the business fast enough,” he says. “So they have to renegotiate the debt or they have to bring in someone who will buy the debt, and if a new stakeholder buys the company it’s anybody’s guess whether Mickey stays. But I don’t think there’s another gig out there for Mickey Drexler. This is probably his last shot.”
If the company has any hopes of a turnaround, the company needs fresh management and a fresh perspective, Cohen said. Brett will need to resolve the litigation issues, stave off creditors, fix the fashion end of things and win back customers. And he needs to do it quickly.
"Brett has to demonstrate that he’s in charge and the direction he’s set is sensible. Then it’s going to be a year or two more to see if the customer buys into it."
Director of Retail Studies at Columbia Business School
For a CEO who’s relatively untested in the world of retail apparel, that might prove an unreasonably tough task. “Realistically, it takes two years at warp speed to fix a broken business. In a year, the business has to start demonstrating that it’s making a positive turn, with two years to reposition. So [Brett] has got a hard slog ahead of him, and he’s got six to nine months of goods in the pipeline already,” Cohen said. “If they’ve gone back to basics, are they the right basics? Brett has to demonstrate that he’s in charge and the direction he’s set is sensible. Then it’s going to be a year or two more to see if the customer buys into it.”
Analysts are also questioning whether Brett is the right person to fill Drexler’s shoes. “Do we think that James Brett is the next Mickey Drexler, or just the next CEO of J. Crew?” Lee Peterson, EVP of brand, strategy and design, at design firm WD Partners, told Retail Dive “I think Drexler [is] the greatest mass merchant of the 20th century. He took an existing brand and took it from zero to what it became. Everything about The Gap made you want to be a part of that. It became a true lifestyle brand. Drexler was somebody special.”
A new era of retailing
While once powerful, Drexler’s strategy is being replaced by a new way of retailing, one that requires CEOs to leverage technology to bring brands into the modern era.
“[Jeff] Bezos is the greatest merchant of this century so far. We don’t need a CEO of J. Crew. We need Bezos to take us into the next century,” Peterson said. “A successor of brilliance, as opposed to just a CEO. And none of these merchant princes have successors. Who’s Ralph Lauren’s successor? It’s not Tom Ford. It’s no one.”
One of the reasons a real successor has been hard to find is because Drexler himself hasn’t yet ridden off into the sunset. “Will Mickey really stand aside?” said Cohen. “Ralph Lauren clearly didn’t let Stefan Larsson do it. The biggest problem with Mickey is Mickey, and everyone at J. Crew works for Mickey.”
Yet perhaps Drexler’s last big winning gesture will be showing that he finally knows when to walk away.
“[Jeff] Bezos is the greatest merchant of this century so far. We don’t need a CEO of J. Crew. We need Bezos to take us into the next century.”
EVP of brand, strategy and design, at design firm WD Partners
“Drexler’s real sin is no successor,” Peterson said. “Not a successor in picking sweaters, but a successor in modern thinking. Thinking the way Bezos does. The way Amazon functions is they have idea groups and execution groups, and Amazon has nutty ideas like drones, and stores like Go. The closest thing I can think of is Urban Outfitters, and Space24Twenty in Austin, which is a hangout space. Stores like J. Crew never take it all the way. And you would think that catalog would translate to online really well, but it doesn’t, and I’m not sure why.”
It's not necessarily what consumers are buying, but how they are doing so, and the internet is changing everything, Peterson said. “You used to see a commercial about The Gap khakis, and think, ‘That’s cool.’ Now you can go online and find out what 100 people think about it too, and then someone else might say, look at this guy in Brooklyn who’s doing something really cool. Maybe you don’t even want khakis.”
But that way of commanding retail trends from the '70s to the '90s became stale after the turn of the century. “There should have been someone talking to Drexler about mass customization instead of opening up new stores," Peterson said. "J. Crew didn’t fail because they didn’t find the next khaki. They failed because the didn’t find a successor who thinks differently. Amazon invented retail AI that you buy from them. It’s a double whammy.”
What’s next for J. Crew?
In the immediate future, J. Crew will go through a period of restructuring. What form that might take, though, may not become clear until Brett assumes the CEO role.
Whatever happens will have to happen quickly if the brand is to survive intact. “The next year and a half will be pivotal in determining J. Crew’s trajectory,” Aryapadi said. “If James Brett is successful in his turnaround efforts, I foresee a strong resurgence, and perhaps J. Crew even going public in 2020. However, if things don’t go according to plan, there is a good chance that key brands will be spun off.”
As the retailer searches for the right way to pivot its business, technology and merchandising will be critical pieces, but the real key, according to Cohen, will be finding a way to connect with customers. “Their success will hinge on getting back with a customer who finds their merchandise compelling,” he said.
It’s not game over for J. Crew yet. In fact, the retailer’s successful Madewell brand may be the anchor that supports a turnaround, giving the company room to rediscover itself, Aryapadi said. “However, if current trends continue, there is a possibility that the Madewell brand and J. Crew Factory stores will be spun off to resolve outstanding debts. Fall 2017 and performance in 2018 are pivotal in determining what happens,” he said.
It’s still not clear exactly how many stores J. Crew may have to shed, or whether it will spin off brands, or drop its price points, but one thing is clear to Peterson: “The brand has too much equity to totally disappear, but ten years from now they’ll have to be something totally different from where they are now.”