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J.Crew Sees Mercantile Offshoot as Opportunity to Do Business Profitably

It’s been a tough few years for J.Crew Group, as sales slipped at its namesake brand and the design team repeatedly missed the mark on women’s styles, but company chairman and chief executive Mickey Drexler is confident things are about to get better. The light at the end of the tunnel: J.Crew Mercantile, the lower-priced spinoff that opened its first store in Dallas last month.

“The retail world today is not defined the way it was a year or two or three ago. We’ve had lots of demand for J.Crew branded goods at other price points. Essentially it’s the way for us to take a business that’s value J. Crew and put it in areas where J. Crew retail would not have been successful, where there would not have been that type of demand,” Drexler said Thursday while discussing the company’s second-quarter results on a conference call with analysts, noting that the merchandise is comparable with what’s carried at J.Crew Factory stores.

Eight more Mercantile stores are set to open in the back-end of the year.

Drexler continued, “It’s essentially a store with really nice goods in it at a value level. The J.Crew brand is a pretty well-loved brand around the world, through thick and thin, and we just wanted to get it out there. It gives us an opportunity to open stores where we can do business profitably—and the economics are very nice by the way.”

The New York-based company could do with a dig-out. The quarter ended August 1 delivered a $13.6 million net loss (on revenue of $593.6 million), compared with a net income of $10.8 million in the year-ago period. Comparable-company sales fell 11 percent following an increase of 4 percent in the second-quarter of fiscal 2014, while adjusted earnings were down to $41 million from $67.6 million. Gross margin fell to 34.3 percent.

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Sales at J.Crew stores in particular decreased 10 percent to $506.5 million and comps declined 13 percent, compared with a bump of 3 percent in the second quarter last year. The company’s Madewell brand, however, saw sales soar 22 percent to $67.9 million and comps rose 8 percent.

“Our performance was in line with our expectation. We anticipated the second quarter to be challenging as we worked through spring and summer inventory,” Drexler stated, adding, “We know what happened to create tough business and we know what to do make it better.”

For starters, the company is recalibrating its selection to focus on “heritage” goods—women’s blazers, outerwear and shoes and men’s denim and outerwear—which will be seen in stores starting with its next delivery on September 14. That means less time and money will be invested in the brand’s high-end J.Crew Collection going forward and more energy will be put into much-loved pieces, like cashmere sweaters, ballet flats and the Regent blazer.

“These are areas where we believe we have a unique and specialized product offering for our customers through color, breadth and style assortment as well as a strong quality story,” Drexler described, adding, “I’m not going to say I think it’s the be-all, end-all because nothing ever is but I think you’re going to be very pleased with what you see. More importantly, I hope the customers are.”