The Gist: Today is not a good day for iconic American retailer, J. Crew. Though 2018 was supposed to be the beginning of a new era for the brand under the leadership of Jim Brett, the numbers say otherwise.
The Lesson: While small, D2C brands can ultra-agile, more established brands may need to take a more measured approach to avoid untested excess merchandise that drives down margins.
The Whole Story: J. Crew “re-launched” September 10th under the leadership of former CEO Jim Brett with a wider size ranges, new product categories, indie designer collaborations, and items from their outlet stores and hip, younger sibling Madewell. Though Brett said he was still dedicated to the brand’s classic “beautiful, feminine imagery,” these changes were a clear departure from their traditional, upscale, preppy aesthetic.
As the brand dove headfirst into this new product approach, the aggressive promotional strategy J. Crew (and many other mall-based retailers) have adopted in recent years was not re-examined. Unlike many competitors who are now trying to reduce discounting to increase margins, Brett said J.Crew would continue their existing promotional strategy through the fourth quarter ending in February.
“Our margins are actually pretty incredible right now and expanding. So, you know you’ll see us be promotional for a while longer. It’s part of the plan,” he said in late September 2018.
Unfortunately, those margins proved to be short-lived. The fourth quarter showed a dramatic drop in the aforementioned margins, which shrunk to 22.4% in the fourth quarter, down from 36.7% a year earlier, in part due to rampant end-of-season discounting and promotions.
In hard dollars, this means the company suffered an operating loss of $64.2 million in Q4, compared to a gain of $4.9 million in the fourth quarter last year. Though the loss was pegged to several factors, one notable datapoint is that $39 million was lost on the disposal of excess merchandise.
Now, not all of this may have been Brett’s fault. Two months after his dramatic relaunch, he exited the company due to philosophical differences with the board. That means the company entered the holiday season with a panel of four executives instead of one, core decision maker leading the way, which could have had an impact on the outcomes. Though J. Crew is trying to remedy their CEO situation, the new financial numbers are making top candidates unsure if there’s even enough cash in the bank to pull off a turnaround. Will J. Crew be able to regain its place in American fashion with this new reality? Time will tell, but in the meantime, expect to see the company banking on Madewell, whose total sales were up 16% during this same period.
Based on statistics reported by Business of Fashion.