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  • Confessions of a Retail CEO: JCG’s Mickey Drexler Admits that IMU is a Flawed Metric 0 comments
    Jun 11, 2010 12:53 PM | about stocks: JCG

    On the Q1 2010 earnings conference call, J. Crew (JCG – $42.61) CEO Mickey Drexler suggested that merchandise margin (or, “maintained margin” per most veterans of the industry) is all that matters at the end of the day.  Here’s the relevant quote below:

    I spoke to a company last week that they have an automatic initial margin, and you know what the merchant said, who is clearly not the big boss?  He said the more we are forced to do initial margins at this point, the more markdowns we take. 

    “We don’t take automatic mark-ups.” 

    We wrote about this topic almost a year ago when URBN management reported a dramatic initial mark-up (IMU) improvement in Q2 2009 and the hoped for a “continuation of this trend.”  Yet, the company also suggested late in the same conference call that the markdown rate at the Urbanchain was “significantly greater” than they would like.  Management also suggested on the call that “merchandise margin” was flattish versus LY (i.e. IMU improvement versus LY offset by higher markdowns than LY).     

    IMU should not be viewed by itself.  IMU is part of a complex algorithm with many variables.  In reality, IMU gains mean nothing if a company has to offset its bloated price points with heavy markdowns. 

    IMU improvement is only worth discussing when it relates to sourcing strategies/savings that a retailer can ‘pocket’ without passing on the savings to the consumer or a sales mix shift towards higher-margin product (that will again be ‘pocketed’).   

    Let’s not forget that a retailer determines its IMU rate.  But the consumer essentially determines the company’s merchandise margin based upon the markdowns needed to move the product at the company’s IMU.

    The moral of the story… Any retail management team can laud its IMU improvement all it wants.  Anyone can go out on a street corner and try and sell a t-shirt for $10 that was sourced for $1 (i.e. 90% IMU).  But, the average selling price (determinant of merchandise margin) and the rate of sale is what counts at the end of the day.

    We’re amazed that so many sell-side analysts spend so much time inquiring about IMU when they should be more simply focused on merchandise margin.

    Disclosure: No positions
    Stocks: JCG
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