Current Events - Week 2 - Management


4277 words
1 September 2008
Volume 158; Issue 4; ISSN: 00158259
© 2008 Time Incorporated. Provided by ProQuest Information and Learning. All Rights Reserved.


Mickey Drexler, the former CEO of Gap, took J. Crew public in 2006 Now he's taking it upscale and launching a new brand called Madewell. Downturns are not for wimps.

Mickey Drexler is about to teach his men's wear design team a lesson about what it means to be a retailer in a downturn. "What year did Christopher Columbus discover America?" asks the 64-year-old CEO. "Fourteen ninety-two!" shouts one designer. "And what was Columbus wearing?" asks Drexler with mock certitude, presiding from a folding chair over this July meeting of J. Crew's designers and executives at the company's headquarters in New York City's Greenwich Village. Khaki-suited mannequins and racks of clothing line the workroom. He answers his own question. "Blue and white. Christopher Columbus discovered America in a blue-and-white sailor shirt, and since then, men have been wearing blue and white shirts." Drexler is wearing dark-blue jeans andyou guessed ita blue button-down shirt. He then proceeds to engage in a straw poll on what color shirts the men in the room are wearing. The majority are wearing blue or white. "You know what ends up on the markdown racks? All the weird colors. Guys don't wear orange or citron." The point, or what in Drexler-speak is known as the "big call-out," is to watch out for over-assortments (the same item in too many colors).

Today is the moment in the life of a garment when art meets commerce. The occasion is the Spring 2009 Men's Finalization Meeting, a quarterly ritual where the designers present rough drafts of future items to their colleagues in sales, whose job it is to move the chinos, gingham-checked shirts, and desert boots through the company's 267 retail stores, catalogs, and website. Together the designers and the sales team will decide which looks are home runs and which will be shelved. (Among the verdicts: Black chino shorts are in; over-assortments of madras shorts are out.) The merchandise must be both fresh and popular, because the current retail environment, says Drexler, is the worst he's seen during his 40 years in the business. He wants his merchants, who decide how many of each piece J. Crew should produce, to be smarter than ever. "Don't be buying out of emotion. Buy less if you love something but feel it's a risky item. We don't want overstock. And remember: No profit, no fun!" he says by way of a benediction.

This little speech might come across as the pedantry of a CEO in love with his own instincts and the sound of them coming forth, but Drexler has the track record and passion to back up the bluster. By his own admission, he is a control freak, happiest when he is involved in every facet of J. Crew's merchandise. (No wonder he's a confidant of Apple CEO Steve Jobs.) Drexler's performance with the design team is one of several ways that he's trying to imprint his DNA on J. Crew's 8,700 employees as he tries to grow the company in a harsh environment.

While J. Crew is relatively small, its 2007 revenues were $1.3 billion, and its entire retail square footage would fit into the space of just 13 Sam's Clubs; Drexler is closely watched in his industry because of the way Gap, which he ran for 19 years, transcended retailing to become a pop-culture phenomenon. The reasonably priced pocket T's, clean white store interiors, and the ads with icons like Miles Davis in khakis made Gap into a kind of iWear for the nation. Gap's clothes were both mass and class, populist and cool. No easy feat when you think about how most of the killer apps in retailing distinguish themselves either by low prices (H&M) or by exclusive product (Neiman Marcus).

Part of what makes Drexler influential is his ability to predict not only what will sell but also how shopping habits are changing, as witnessed by his launch of Old Navy in 1994 Old Navy allowed Gap to get a jump on big retailers, including Target, which were talking about injecting more style into their apparel assortments. What does Drexler's trend-spotting instinct tell him now? He thinks the dominance of the big-name designer is played out. He's stacking his chips on quality goods at a fair price, repositioning J. Crew as a luxury-for-less alternative. At the same time, he is launching his first new separate retailer since Old Navy. The fledgling Madewell chain-which has opened at ten locations, including New York City, Los Angeles, and Dallas—is aimed at the J. Crew customer's edgier siblings. Think jeans and boots rather than skirts and sweater sets. Madewell's name has a deliberate throwback quality that often appeals to a youthful craving for authenticity. (Anyone for a Pabst Blue Ribbon?) When Drexler was leaving Gap, a friend hipped him to a defunct New England manufacturer bearing that name. He fell in love with the script logo-reminiscent of the Peterbilt truck's typography-and bought the rights to the name shortly after he joined J. Crew. "There is a great opportunity for J. Crew to pick up the Abercrombie & Fitch graduates. The children of the baby-boomers are three years away from getting into their 20s, and there are not a lot of retailers that are well positioned for that phenomenon right now," says Brian Tunick, a specialty-retail analyst at J.P. Morgan Chase. In fact, both Abercrombie & Fitch and American Eagle Outfitters have recently launched more adult lines, called Ruehl and Martin + Osa, respectively.

As confident as Drexler is, the timing is risky. While J. Crew is offering a better value proposition, it's going upscale at a moment when the average American consumer is scaling back on discretionary spending. In May the company revised its earnings guidance for the rest of the year, projecting that comparable-store sales growth will be flat or in the low single digits, which sent the company's stock (JCG) from $49 in May to $28 in August. And therein lies Drexler's dilemma. Wall Street wants to see growth, but the CEO doesn't want to go on a store-building binge, because if the chain is too far-flung even someone with Drexler's bandwidth won't be able to walk into every one of the stores-something he loves to do-and quiz associates about what they're seeing and hearing on the sales floor ("Which competitors' shopping bags are we seeing?" "Are customers complaining about designer prices yet?").

So the reason this master merchant is putting the fear of a recession into his staff is that he has seen fire and rain. Or more specifically, he made it rain cash at Gap for nearly two decades and then was fired in 2002 after a two-year slump. As Gap grew from 550 to more than 1,800 locations, Drexler's executive duties increasingly took him away from his favorite parts of being a merchant-the stores and the merchandise. He increasingly disagreed with the Fisher family, who controlled more than a third of the company. A bet on trendier, sexier clothes failed to pay off, and suddenly Drexler was out. "The clothes got weird, and I went along with it," he says now. "But I'm not allowing it to happen here. Whatever we do here has to be consistent with the mission of J. Crew."

During his time at Gap, Drexler had cashed in more than $400 million in Gap stock options, so it was easy for him to pass up a $2 million severance package that came with a string attached-a nonsolicit clause, which would have made it tough for him to compete with Gap had he gone to work for a competitor. While he was at Gap, however, his next opportunity was taking shape. In 1997 the private equity firm TPG bought an 88% stake in J. Crew from Emily Cinader and her catalog-mogul father, Arthur, for just under $527 million. The father-daughter duo had launched the preppie outfitter as a catalog in 1983 and opened their first retail store in 1989 at New York City's South Street Seaport. After TPG bought in, the firm went through three CEOs in five years, trying to get the formula right. When TPG decided to hire Drexler, six months after his ouster from Gap, J. Crew was hawking cheaper goods in an effort to become a mass-market outfitter. "I believe that temporary career setbacks can make CEOs even stronger and better," says TPG founding partner James Coulter, who recruited Drexler for the job. Three years later the company went public, with Drexler getting an 11% stake (he currently owns 15%).

J. Crew is not Drexler's revenge, however. It is more his magnum opus, the sum of everything he has learned about retail—first as a boy working weekends for his dad, Charles, a button and piece-goods buyer in New York's Garment District, then as a young buyer for Bloomingdale's and Macy's. The lessons from those giants were mostly cautionary tales about managers who got too far removed from the sales floor and lost their touch. Maybe because of all that he's experienced, Drexler sees the stagnant economy as not only a trial but also as an opportunity, a chance to steal business from department stores and brand-name designers. His logic is straightforward: Why can't an American retailer use the same Italian mills and fabric makers as European designers but then deliver a more affordable alternative to goods sold at department stores and boutiques? "Designer goods have become much too available, either through their own distribution or through logo counterfeiting. I see the world moving away from carrying a bag around with the designer's initials or designer's logo," says Drexler. "The more you see of anything, the less special it becomes. It's kind of like the first slice of pizza vs. the sixth. The first you're like, 'God, this is amazing!' The sixth you're like, 'Enough already.' So I think there's an opportunity for us to deliver stylish, quality goods like a woman's blazer for $350, compared with a designer one for $2,500."

THE TWO ASPECTS of corporate culture that strike most visitors to J. Crew's headquarters are the open plan and the public-address system. "Hi, everyone, it's Mickey. I'm at Koi, waiting to meet my son for lunch, and I'm seeing a woman wearing our Florentine-print dress," echoes Drexler's voice over speakers spread throughout two floors of cubicles. His assistant has patched him in from an Asian restaurant in Midtown Manhattan. "Her friend just asked her where she got it. She said, 'J. Crew.' It's going to be a great lunch!"

Drexler calls these stream-of-consciousness shout-outs his "radio show." He believes it keeps everyone in the loop and makes management accessible. He wants the company to feel small and familial, in part because he believes the next monster hit can come from any employee at any level. A notable case occurred not long after he started, when he was chatting with one of the phone operators at the company's call-in center in Lynchburg, Va. She told Drexler that women were ordering a popular beach dress five at a time in different sizes. She surmised the customers were brides looking for an affordable bridesmaids' dress. Weeks later, J. Crew was in the weddings-and-parties business. The website now offers 21 varieties of bridesmaids' dress, from $165 to $550.

Despite this informal vibe, Drexler really wants his team to pay attention to the small stuff. "Retail is detail" is a favorite Drexlerism. No detail is too small—be it the buttonholes on a man's suit jacket (see "Anatomy of a Suit") or the pastries set out for the interns at J. Crew last summer. When Drexler saw tired-looking Danish and found out the spread cost $150, he summoned his senior executives over the public-address system to defend what he viewed as a terrible introduction to retail for the interns. The next day they had fresh fruit for half the cost.

His eye for detail is the driving force behind some of the company's new luxury-for-less ventures. One way J. Crew is drawing attention to its higher-end men's wear is by opening the Liquor Store, a 935-square-foot space that was formerly a wood-paneled bar in New York's Tribeca neighborhood. In addition to suits, chinos, and desert boots, the store will sell vintage Timex watches, Redwing work boots and Mackintosh raincoats. The store will also sell a few Baracuta jackets (picture the windbreaker Steve McQueen wore on the cover of Life in 1963 and your dad wore raking leaves). The design team had been talking about reviving the jacket, but it became official after Drexler spotted one hanging on the back of a chair in the window display of a London boutique. By using these heritage brands, Drexler hopes to tap into guys' love of lore. J. Crew will also be offering men's shirts in fabrics made by Thomas Mason, the textile manufacturer that many Jermyn Street haberdashers use. Says Todd Snyder, who followed Drexler from Old Navy to become J. Crew's senior VP of men's design: "I was getting shirts custom-made for myself, and then one day Mickey asked me, 'Hey, where did you get that shirt?' He said, 'Why don't we do it for J. Crew? And by the way, can you make me some as well?'" The off-the-rack version of the shirts off Drexler's back will retail at $128 for the dress model and $98 for a more casual version.

These brands tap into nostalgia, but Drexler does not want J. Crew's stores to be fantasyscapes that transport the shopper back to the country estates of Evelyn Waugh or the Africa of Isak Dinesen's memoirs. He dislikes the way a lot European designers' boutiques are intimidating. "Maybe its my Bronx upbringing, but I don't like elitist approaches. We don't take ourselves too seriously at J. Crew," he says. "Going into a store is kind of like meeting a person. I want J. Crew to come across as open, warm, and friendly."

The stores achieve this desired effect through bright primary colors on the walls, bold prints on the mannequins that greet shoppers, tables where customers can paw through sweaters, and sisal rugs on the floor that give the proceedings a touch of the beach. The clothes are classics with a modern twist. The music is hip but not deafening, and Drexler wants his salespeople to be multi-culti like the old United Colors of Benetton campaigns-a store that he admired in its heyday. Drexler wants his house to be a place where you'd want to hang.

A major change at J. Crew since Drexler took over is that the company's design team has more influence. Jenna Lyons, the creative director, has been at the company since 1991 but lately has become a rising star in the design world. Tall, reed thin, a working mom who grew up in Palos Verdes, Calif., she has a sense of newfound pride: Women she considers chic are wearing her handiwork and supermodel Inguna Butane will be in an upcoming catalog. Since Drexler's arrival she has also been able to source textiles from better Italian mills, including Ratti, which provides prints to some of Europe's leading designers. She will be debuting an upscale line called J. Crew Collection this fall. More important, the relationship between designers and merchants at J. Crew has changed. "We used to get pretty serious, heavy direction from the merchants in terms of what they needed. Now we get to completely design a line-we get to dream the dream," says Lyons. "Mickey understands good art can drive the commerce. He makes the analogy with the auto industry a lot, and I think one of the reasons that American carmakers aren't doing well is they've forgotten about design."

Drexler's time on the Apple board, where he has been a director since 1999, validated his instinct to let the creative team lead at J. Crew. After all, clothes are commodities as much as MP3 players are, "but there's nothing as good-looking, as cool, as an iPod," Drexler notes. The influence worked both ways: Drexler played a pivotal role in the early days of Apple's foray into retail. He suggested to Jobs that before Apple open its first store, the company should build a version of it in a warehouse. Drexler saw the early version of the designs and helped the company come up with a slicker version more consistent with the brand's design legacy.

Drexler's love of design and his garmento wisdom come together in his hobby-buying and refurbishing real estate. The way some CEOs book tee times at Augusta National, Drexler loves looking at property. He can discuss the pros and cons of Manhattan's trophy apartments-the ones in the exclusive co-ops-as if they are potential store sites. He owns homes in Bridgehampton, N.Y.; Sun Valley, Idaho; and Harbour Island, Bahamas. The jewel in the crown is Eothen, the old Andy Warhol estate in Montauk, N.Y., one of the last great parcels of oceanfront real estate on Long Island's East End. Drexler bought the 5.6-acre property for a reported $27 million and plans to restore the compound of cottages to the feel of an old fishing camp.

The green grass and clear ocean of Eothen is a far cry from the Bronx of his childhood. (The same borough spawned two other industry giants: Calvin Klein and Ralph Lauren.) There, Millard S. Drexler grew up in a one-bedroom apartment. His mother, Mary, was diagnosed with breast cancer when he was 2, and she died 14 years later. He attended Bronx High School of Science, graduated from the University of Buffalo, and got his MBA at Boston University, where he met his wife, Peggy, now a psychologist, author, and lecturer. The couple have two children, a grown son and a teenage daughter.

LONG TERM, DREXLER'S BIGGEST CHALLENGE may be showing Wall Street the growth it craves. Since taking over, he has made great strides in pumping up two key metrics-sales per square foot and operating margins. J. Crew's 2007 operating margin was 12.9%, compared with the 7% to 8% average in its competitive set. Last year its sales per square foot were $569, well above the $400 average for the sector. That leaves J. Crew a few additional avenues of growth: build more stores, launch new brands, and stoke its fast-growing e-commerce. Opening new stores would be the easiest way to show Wall Street growth, but Drexler doesn't want to go down the road that has led to so much grief for overstretched retailers from Gap to Starbucks. Right now J. Crew plans to open 36 new stores by year-end and close two underperforming locations, bringing its total to 301. Still, that's a small footprint compared with Abercrombie & Fitch's 1,000-plus stores or Banana Republic's roughly 550. "Three hundred retail and 100 factory stores is not the cap, but it's kind of the intermediate goal," says James S. Scully, the company's CFO. J. Crew has no plans to go abroad. It is almost as if Drexler burned his hand on the stove of expansion when he was running Gap and has no interest in trying it again.

Selling directly to customers, either through catalogs (of which there are 13 a year) or over the web, is more the focus at J. Crew. Compared with the flat or slow revenue growth expected from the stores this year, the company is predicting direct-sales growth in the high single digits. Last year 28% of the company's total revenues came from web and catalog sales. That's markedly higher than competitors, including Talbot's (19%), Urban Outfitters (14%), and Limited Brands (which includes Victoria's Secret and clocks in at 14%). Wall Street likes to see healthy direct sales because that's a way to show growth without real estate costs, and as more and more computer-literate progeny of the baby-boomers graduate to adult brands, online shopping will continue to grow. The downside is that when there's a hiccup with the website, as there was during an upgrade to improve customer service this summer, the Street reacts. On July 31, Drexler and Tracy Gardner, J. Crew's president of retail and direct sales, posted an apology. "We've made some mistakes … too many, in our mind … We know we've let you down." This cyber apology may have made customers feel better, but it knocked two bucks off the stock.

SO SHOULD DEPARTMENT STORES or designers who slap logos on their clothing (and hefty markups on their customers) be worried about J. Crew? Industry watchers and retail veterans think Drexler may be onto something. "There's an opportunity to capture customers who are looking to belt-tighten, looking for a little bit more value out of their apparel purchase," says Kimberly Greenberger, Citi senior retail analyst. But Greenberger cautions that going upscale could be a zero-sum game in which Drexler prices himself beyond the reach of the customers J. Crew already has. Says Greenberger: "We think consumers at every level are getting squeezed."

Even as he unleashes his designers, Drexler seems to keep that in mind. If art begins to drift too far from commerce, Drexler will be the first to speak out. He may invoke Christopher Columbus—or another great Italian of the Renaissance. When Jenna Lyons and her women's design team had their finalization meeting and showed one too many colors on a certain item, for example, they were treated to a lecture. "The big call-out today is too many colors," Drexler lectured the designers and merchants. "Leonardo da Vinci didn't make the 'Mona Lisa' in four colors; he made it in one." And if his company can make it through the downturn, Mickey Drexler may finally have painted his masterpiece at J. Crew.

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