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A Closer Look: J. Crew Continues to Grow with Madewell

There’s no doubt about it – it’s tough out there for apparel retailers. Faced with a stagnant economy and a brutal slowdown in consumer spending, most have sharply cut back expansion plans to save cash. But not every firm is waiting for the economy to recover. J. Crew Group Inc., the New York-based preppy clothing chain, has slowed down its growth of its namesake stores. But at the same time, it is continuing to expand its new urban concept, Madewell.

“We have not cut back there,” CEO Millard Drexler said of the Madewell chain at an investor conference last month. “In fact, when there are the right deals, we are making them.”

The company certainly has not been immune to the recession. J. Crew does not report its fiscal fourth quarter until March but it has already cut back its expectations, saying it will likely report lower-than-expected sales. In January, J. Crew warned investors it would record a loss for the quarter along with a decline in same-store sales in the mid-teen range. J. Crew largely blamed the aggressive discounting it was forced to do to get rid of fall and holiday inventory. At the January conference, Drexel called the environment “probably the most severe any of us in this room have seen,” adding he has “no prediction about how long it will last.”

To respond to that environment, J. Crew has cut back half of its planned growth in its namesake stores and is targeting a 25 percent cut in its capital expenditures for the 2009 fiscal year. On its third quarter earnings conference call in November, the company said it would chop its square footage growth in half in 2009. J.Crew has also said it may not pay down as much debt this year as it normally does at the beginning of every year.

But the one thing J. Crew is not doing is cutting back on the growth of its small Madewell chain. Drexler made clear on the third quarter call that the cut in the company’s square footage growth excluded the Madewell openings planned for the year and he has frequently said he is pleased with the performance of the small business.

The chain caters to a young, hip clientele looking for skinny jeans, trendy bags and fringe-heavy scarves. Drexler has likened the chain, which specializes in denim and sells its own denim brand, to Levi-Strauss.

There are now just 11 Madewell stores open. The most recent store opened on Feb. 18 in Boston on Newbury Street—a district known for its pricey and hip boutiques. (Both Chanel and Marc Jacobs have stores there.) J. Crew has said it will likely open between 10 and 15 Madewell stores in 2009, adding that it will continue to be conservative in opening new stores. “Penciling out deals these days has to be done with a very, very conservative mindset,” Drexler said.

Morningstar analyst Brady Lemos says he believes the company is mainly waiting to open stores until it finds the right locations for the right prices now that more landlords are willing to offer lower rents and better lease terms. The company has likely been able to find better mall and urban street locations as other chains shutter stores, Lemos says.

J. Crew does not break out the performance of the Madewell chain in its earnings reports, so Lemos says it’s “kind of hard to tell how successful the concept has been” – a situation made more challenging given the small number of stores. But Cowen & Co. analyst Laura Champine says that Madewell performed better than expected in 2008. She expects the company to launch an online site to accompany the Madewell retail stores in fiscal 2009.

Although the Madewell stores are still operating at a loss – and are expected to for the remainder of the year – once more stores open up, that could change. Lemos says he expects the company to ramp up store openings as soon as the environment for retailers gains some strength and sales start to recover.

--Lauren Shepherd

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