J. Crew (JCG) – $43.27 appears to be encouraging TPG Capital and Leonard Green & Partners LP to sweeten their $43.50 a share offer to acquire the company. This is an attempt to sway skeptical shareholders.
This deal has been fraught with accusations of CEO Millard Drexler insisting on only dealing with TPG and keeping early-stage talks of the deal from the company’s Board of Directors. We’re not sure anyone is surprised about these accusations.
Here’s what is interesting from our perspective.
In our view, JCG management has a spotty track record when it comes to its communication with the investment community. While Mr. Drexler has generally been upfront regarding merchandise issues on quarterly conference calls, we’re reminded of a couple of situations in which management may have been less than forthcoming.
For example, the company’s dramatic losses on the Madewell chain were always sugar coated. It’s hard to fathom how a chain with only 17 stores at the end of FY 2009 lost $13 million at that particular stage of development. Will Madewell will go the way of Ruehl and Martin + Osa once Mr. Drexler exits the public arena and no longer needs a growth vehicle to keep a wide range of investors happy?
Also, we never believed that the company’s Crewcuts product ever attained the level of success that was generally suggested by management in FY 2008 & FY 2009. The fact is that the company’s SEC disclosures (Crewcuts = 4% of the company’s sales mix in FY 2009) never warranted the puffery by management on quarterly conference calls (it’s worth noting that JCG management finally stopped “talking up” the Crewcuts product when the company began removing the product from select shop-in-shops in FY 2009).
Finally, JCG management had a somewhat disingenuous track record re: its DTC Channel system upgrade issues on FY 2008. See comments below.
In early-July 2008 at the Oppenheimer conference, JCG’s CFO suggested that:
The website’s problems were only an issue from June 28th – July 7th.
On the Q2 2008 conference call (late-August 2008), JCG management suggested that:
Based on the recent trend in the direct business and our ability to service our customers, we are beginning to return to more normalized levels.
On the Q3 2008 conference call (late-November 2008), JCG management suggested that:
We are currently not experiencing constraints on our ability to capture, process, and ship customer orders or to transfer product between channels. Our focus has now shifted from stabilization to preparation for peak.
On the Q4 2008 conference call (early-March 2009), JCG management suggested that:
While we largely stabilized our direct systems infrastructure during the third quarter, we still experienced site delays and down time during our peak season, which negatively impacted our fourth quarter direct results.
Let’s not forget the time back in Q3 2007 when the company suddenly changed its sales return reserve in its DTC channel. This adjustment was not mentioned in the company’s press releases and was only given a subtle mention in the company’s prepared remarks on its conference calls (with no mention of the positive impact on EPS).
Big picture, we’ve seen this movie before. A company (e.g. JCG, ex-GYMB) starts to see material EPS downside versus consensus expectations ahead and tries to quickly locate a suitor (in this case TPG/Leonard Green) willing to buy at a price that contemplates a much higher level of profitability than will be the case 3-6 months from today.
Gymboree management clearly wrote checks that the company could not cash (click here to see press release indicating that Q4 2010 earnings ended up being well short of consensus expectations prior to deal closing).
JCG management may be trying to get this shotgun wedding completed before they have to fully come clean regarding their view of the company’s earnings expectations for FY 2011. Makes sense, if you’re the seller.
We’re at $1.86 in FY 2011 and that may be a bit optimistic (click here to see our EPS model).
It will be interesting to see how this plays out. But, in our view, the shenanigans that some are suggesting about the deal’s dynamics appear to mirror those of the company’s past communications with the investment community
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.