J.Crew Group (JCG) announced that it agreed to be acquired by funds affiliated with TPG Capital and Leonard Green & Partners. J. Crew competes with other specialty retailers like Gap (NYSE:GPS), Aeropostale (NYSE:ARO), Abercrombie & Fitch (NYSE:ANF) and Urban Outfitters (NASDAQ:URBN) and Ann Taylor (NYSE:ANN).
Under the terms of the agreement, holders of the outstanding common shares of J.Crew will receive $43.50 per share in cash, or a total of approximately $2.86 billion. The price represents a premium of 16% to J.Crew’s Tuesday closing price before the announcement and 29% premium to last month’s average price. This is nearly 3% higher than our price estimate for J.Crew’s stock of $42.35.
Resilient in Economic Downturn
Last week J. Crew announced its 3Q10 earnings reporting that its store sales increased by 1% and direct-to-consumer sales increased 12% vs. 3Q09. During the recent economic downturn when many of its peers were badly hit, J. Crew was able to grow revenues by focusing on basic styles rather than fashion-forward items leading to market share gains. This strategy is continuing to pay off.
In addition to this, J.Crew has been working on improving its sourcing and distribution processes, which has helped to reduce costs and improve gross margin by nearly 6 percentage points during fiscal year 2009. For the first three quarters of fiscal 2010, its gross margins were up by nearly 1.5 percentage points vs. the same period last year.
Women’s Fashion Push
The brand has been able to achieve a well-defined identity through its marketing campaigns, social media and a good in-store experience. This image has worked well for its women’s apparel division, which has been endorsed by Michelle Obama in the past.
J.Crew is expected to continue to leverage such marketing initiatives to enhance its women’s line. Currently, women’s apparel constitutes nearly 80% of the revenue from J.Crew stores and accounts for 34% of our price estimate.
Sales Metrics to Improve
J. Crew’s strong brand value, multi-channel operations and improving margins position the company extremely well to expand its business. With retail spending picking up in the US, J.Crew expects strong sales during the holiday season.
Revenue per square foot, a common retail sales metric we track, increased from around $460 in 2005 to $530 in 2009. We expect it to approach towards the$700 mark by the end of our forecast period. If we upped the revenues per square foot to $750, this adds about 3% to our price estimate.
Disclosure: No position