A Closer Look at the J. Crew Group Buyout Offer

| About: J CREW (JCG)

Analysts and experts on Wall Street have expressed surprise at the timing of J. Crew Group (JCG)'s agreeing to a $2.86 billion buyout amid sliding retail sales, with some comment centered on how such a fourth-quarter retail deal being unusual: Typically a buyer tends to overlook a retail company's holiday season performance, while the seller obviously wants to make sure it's getting the best justified price. On the flip side, however, the retailer is allowed to solicit better offers until this coming Jan. 15; if nothing materializes by then, it is bound to close the deal in the first half of fiscal 2011.

Under the proposed deal, TPG Capital Group and Leonard Green & Partners LP will buy the company for $43.50 per share in cash, or about $3 billion, a 29% premium to its average price over the past month and a premium of more than 15% compared with J. Crew's share price before the deal was announced. JCG's shares were +3.2% yesterday, and have risen almost 19% since Oct. 25, as buyout rumors swirled. JCG remains halted.

Better Deals Ahead?: Thomson Reuters has quoted Eric Beder, an analyst at Brean Murray Carret, as saying that other private equity players would definitely look at a J. Crew Group bailout, adding that a price of $46-plus is justified. Meanwhile, other analysts have made similar suggestions, saying that a higher offer over the holiday season would not be a shock, as shareholders are likely to scrutinize the current deal even more closely as it involves current CEO Millard Drexler, who was first drafted in to J. Crew after TPG bought it earlier in 1997.

Q3 Results: According to JCG's announcement of financial results for the three months (third quarter) and its first nine months ended October 30, 2010, revenues increased 4% to $429.3 million; store sales increased 1% to $303.3 million, with comparable store sales decreasing 1%; and comparable store sales increased 8% in the third quarter. Operating income decreased to $64.1 million, or 14.9% of revenues, compared to $75.2 million, or 18.2% of revenues, in the third quarter, while net income was $37.8 million, or $0.58 per diluted share, compared to $43.9 million, or $0.67 per diluted share, for the same period.

Meanwhile, on August 31, the company made a voluntary prepayment of $49.2 million, representing the remaining principal amount outstanding under the term loan. Therefore, there was no debt outstanding at the end of the third quarter, compared to $99.5 million at the end of the third quarter of fiscal 2009.

High End Retail Outlook Negative: With the trend in high-end consumer retail moving towards outlet stores and any other methods of pushing discounts, the luxury market will not look like what it did during its heyday for many years. Although its true that risk of any struggle in growth out of the recession could threaten the company, the company needs consistent growth to see continual growth.

Disclosure: No positions.