On Friday, J. Crew (JCG) cut guidance. The stock promptly fell 20%. It also cut
short the rally that was taking place in apparel after earnings from American Eagle (AEO) and Ralph Lauren (RL) in the
middle of the week – we even had a follow-through day there!
Why is J. Crew's profit warning cause such a widespread sell-off, especially
when other companies, just days before, had said that their outlook wasn't as
bad as everyone imagined? I think this is an example of short-term, widespread,
sell first and ask questions later thinking.
Unlike several other apparel retailers, the earnings estimates for J. Crew
had actually come up previously. This made it an exception in a space where the
estimates – both near and full-year – had been coming down in names like AEO,
RL, and Abercrombie (ANF). With reasonably high expectations, then, it's fair
that the stock would get crushed once it got lumped in with other retailers that
had already been whacked.
Still, if you listen to the J.
Crew call, CEO Mickey Drexler has some extremely interesting things to say
about how the company is being managed (conservatively), the macro environment
(tough, but no excuse), and the focus (long-term, i.e. no big markdowns on the
way). While I like hearing things like that, and have enormous respect for
Drexler as an apparel executive, I still think J. Crew is a dangerous stock to
be buying right now. It isn't exceptionally cheap at 21x forward earnings, and
even though their strategy might create long-term value, it could result in some
rough short-term results that Wall Street probably won't overlook.
My favorite part?
J. Crew CEO Mickey Drexler: I just want to say something. This is all a
forecast. America in the last six months pretty much gets an F on forecasting in
most sectors of America. Understand, this is not a science. Alright? It is not a
science. We are here as responsible shareholders of the company to manage this
business with the utmost of prudent and conservative ways. I don't know anyone
in the world, frankly, right now who will tell you what the margin will be other
than best estimates for the next two months. This is a world that is going
through rapid changes. No one forecasted the housing crisis except one or two
successful people. No one forecasted the credit crunch. We forecasted a
recession in January. Why? Because we felt it was never a downside to run a
conservative business and not trying to be greedy at the top end and top
line.
Perhaps a little frustration showing through, but very accurate
nonetheless.
In short, I think there are more attractive stocks in apparel than JCG –
namely, the ones that have recently reported and affirmed or raised guidance.
