• It's Coming...

    MARKET EDGES

    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

History is repeating itself. Retailers that don’t respect the impact of macro trends in planning their businesses are destined for mediocrity – at best.

Here’s a lesson about what not to do in retail. 1) Get over confident in your brand and market positioning. 2) Allocate capital accordingly – including on expensive real estate. 3) Ignore the macro headwinds coming and the change in behavior likely to be seen as competitors get increasingly desperate. 4) When comp plans start to miss, jam more product into the stores to drive revenue.

This, unfortunately, is J Crew. It was Gap as well (both Mickey Drexler). Not to unfairly single him out – this has been the case for many a retailer that doesn’t do macro analysis in planning their respective businesses.

Where does this leave JCG now? In a bad bad spot. Take the quarter, for example. Comps were flattish, and 10% revenue growth was almost entirely driven by square footage. Revenue is trending down steadily on a 1, 2 and 3-year run rate. Gross margins, however, took a sharp dog leg down – the greatest since 2004. When this happens, we should expect inventories to end clean, right? Not with JCG. Even with margins down meaningfully, inventory was up 25% at quarter end.

This is when our sales/inventory/margin map tells a frightening story. Check it out below. One might think that any move from where it is today is a positive one (i.e., things can only get better, right?). Not true. It is possible for JCG to own that lower left quadrant for several more quarters to come. Management’s current guidance does not suggest that this is the plan.
This is the worst place for JCG to be. History shows us that a position in this quadrant is usually not only a 1quarter rental.