beauty call

During Mickey Drexler’s tenure as CEO of the Gap, he transformed the company from a dumpy jeans outlet into the retailer that brought casual chic to the masses.  But in spite of his enormous success, he was  unceremoniously and publicly dumped by Gap’s board of directors (despite a secret warning call from then-board member Steve Jobs).  His pride may have been bruised, but he was by no means defeated.  Drexler was immediately scooped up by J. Crew and went on to conduct a more private internal overhaul of the brand.  By adjusting its price point, product mix and supply chain, he set J. Crew apart from other mid-market retailers, a move that would prove to have some unexpected benefits down the line.

 We recently stumbled across a fascinating transcript of the J. Crew Q3’08 earnings call between Drexler and analysts from his investors, directly after the collapse of Lehman.  This was the precise moment the shit hit the fan, financially speaking, and Drexler faced some hard-hitting questions from the men and women controlling his cash flow.  Far from sounding cornered, he gave answers so eloquent, that flowed with such ease, he seemed as if he knew this was coming all along.  

 Read a selection of the transcript after the jump…

(via seekingalpha.com) 

Brian – J.P. Morgan

Mickey, talk about how you think the brand gets back to a full-price business next year after we’ve seen a lot of customers obviously coming in and seeing additional 50% off clearance and things like that.

 Mickey

I think that’s a really good question. I think the entire industry and the world is in the same position. Frankly it’s a couple of things here and I wish I had a crystal ball on that. I think the reset button has been pushed on value in America; homes, cars, gasoline, clothing, apparel, stocks, and everything else. It’s all about inventory management and the quality of the goods.

 You can go out there today and designer goods, other goods, branded goods in some of our most famous department stores are 50% to 75% and more off. So that devalues the value of everything we’re dealing with. There’s a huge migration going on in America now from high priced I-need-to-have-it might-not-be-able-to-afford-it goods to in fact high quality more value intense goods.

 There’s clearly an opportunity. We’re going out with categories this spring; our ballet flat category will start at under $100 for the first time ever. We’re doing T shirt businesses at prices with good margin, and margin’s a function of sell-through, along with high initial margin. So in some cases, this is all merchandising,

 We’re weighting our inventory differently than we have this past fall. You’ll see inventory weighted towards more friendly price points so that it kind of averages out. I think the reset button’s been pushed on price and I think we’re all dealing with where that will end up.

 That’s really the billion dollar question for the retailers: When will they trust your prices again?

Roxanne – UBS

I’m just wondering what customers are willing to buy at full price? What items are they gravitating to and what items are they saying no to the most?

 Tracy

What we’re seeing is, [trending toward things like] a beautiful ruffly blouse. We hate to call them graphic T’s but the T-shirts that have all the fabulous embellishment, embroidery are blowing out. Our match stick cords continue to be phenomenal; our match stick denims. There’s good response inside of our product for sure. Color, the customer is still responding to our color. They still love our cashmere cardigans. They’re still responding, the ones who love us, to what we strategically positioned ourselves to be.

Christine – Needham & Company

Mickey, from your comments earlier, it sounds like the more trendy or fashion items are selling a little better than the fashion basics. I’m wondering how the [inventory] mix will be skewed in spring and summer?

 Mickey

Trendy is probably not a J. Crew term as much. I would say it this way. It’s newness, flow; when there’s an emotional item in the store like the ruffled blouses and embellished T’s. So it’s emotional.

 Differentiation of your product is more important than ever. The one beautiful thing about customers is they notice those differences and those details. No more loading in 10 colors and five basics at all. Those days are gone.

Randal – Jefferies & Co.

Mickey, quick question. You’ve talked in the past about the J. Crew positioning from an accessible or aspirational kind of luxury perspective.  As we’re moving more to a value environment, can you kind of give us a sense as to how you think the pricing paradigm of your business will change heading into this type of environment?

 Mickey

As I said before we’re categorizing, we’re identifying certain opening price points. If you look at our January catalog, you’ll see a ballet flat assortment at $98. This [past] year I think they started at $128.

 I think that for us there’s good news/bad news. The business is value and I don’t want to call them “trading down”, but we see a really nice movement from designer competition at higher levels around America.

 We’re getting a lot of the so-called better stores’ customers who are now buying our cashmeres, buying our jackets, are confident enough and it’s been validated by all their friends.  It gets further validated by, I mean it sounds silly, but even by Michelle Obama, which had a huge impact on publicity. I can’t say she drove plus comps but I think we’re in a nice position in that regard.

 But I think there’s a big migration going on and will continue to better value, not over-priced goods. Try buying a better jacket in America; a well-made jacket in men’s or women’s either in cashmere or in fine quality wool for less than $1,000. That’s a game we’re playing very aggressively but kind of being subtle at the same time. It is a mission.

 I think from a positioning standpoint, we don’t want to be the biggest. We don’t want to own the whole market. We don’t want to be the cheapest player. We want to be the longest-lasting, high integrity, quality player and I think it’s working.

 I don’t want to say it’s like the American automobile industry, but it’s not that different. Innovation wins whether it’s Apple or whether it’s Toyota. We’re in the innovation business and that’s what we love doing and that’s what we think will continue to drive our customers to shop with us.

Randal – Jefferies & Co.

You kind of have two customers. You have that trade-down customer that had those better goods.  But I’m thinking more of the suburban mom out on where I live in Long Island.  How do you think of the pricing paradigm addressing that less fortunate kind of customer?

 Mickey

If they’re less fortunate, they’re probably not coming to J. Crew in the first place. I think what you’re seeing is interesting. The customer shopping those stores today [Saks and J. Crew], it’s not the normal customers. There are a lot of bargain hunters out there who are, I don’t want to say they’re grave dancers, but why not take advantage of 50% to 75% off of goods?

Our core prices are not very high. Most of our money is made under $100 through good times and not good times. The largest share of our top business is $18 to $78.

I hear what you’re saying and we’re sensitive to it because we’d be crazy not to. Right now what you’re seeing is a different behavior.

 I remember when I first started shopping in Europe. [There were] lesser units, higher quality and the best won. I think what’s happening is in America the mediocrity has risen along with the best over the last five or 10 years. I think those days are over. You can’t compare a GM car or price it to Toyota in quality. People want the quality for the value.

(View the full transcript)