J. Crew scraps cheaper brand, putting deal with Amazon in doubt

Apparel seller to discontinue Mercantile, the only brand it sells on Amazon

J.Crew Group Inc. will discontinue its budget clothing line called Mercantile and shut down the newly launched Nevereven brand, according to an internal memo sent Thursday to employees.
The moves undo some decisions made by former CEO James Brett, who departed earlier this month after a disagreement with the board about the company’s turnaround plans.
In the memo, reviewed by The Wall Street Journal, the company told employees its priorities will be to “return the J.Crew brand to profitable growth” and “more diligently manage our balance of investments and expenses,” among other plans.

J.Crew Group is without a CEO heading into the holiday season all photos wsj

The elimination of Mercantile calls into question J.Crew’s deal with Amazon.com Inc., which currently sells only Mercantile products. Mr. Brett, before his departure, struck a deal to sell on the site, a reversal after the company had long resisted Amazon for fear it would cheapen the brand.

According to the memo, J.Crew plans to focus on growth for its overall lower-priced outlet business, including in stores and on its website. The phase-out of Mercantile next spring and summer is meant to free up staff to work solely on the outlet business, which has 175 stores, currently including 42 Mercantile stores. “We believe that a ‘good’ price tier opportunity is better served by the J.Crew label,” the memo says.

J.Crew will phase out Mercantile, according to an internal memo

Upon Mr. Brett’s sudden departure, his duties were assumed by four current executives, who have formed an “office of the CEO.” The change leaves the fashion retailer without a sole chief executive as it tries to revive its fortunes heading into the critical holiday season.

On November 29, the company said revenue increased 10 % to USD 622.2 million in the third quarter. Comparable sales increased 4 % at J.Crew and 22 % at a smaller brand, Madewell.
The company reported a net loss of USD 5.7 million compared with a loss of USD 18.4 million in the third quarter last year. Adjusting for lease terminations, “transformation costs” and other fees, the company said its earnings before interest, taxes, depreciation and amortization were USD 53.6 million, compared with USD 68.4 million in the year-earlier period.
Mr. Brett, a retail veteran who previously led furniture chain West Elm, was hired last summer amid a yearslong sales slump, when Mr. Drexler stepped aside after more than a decade as chief executive.

In an earlier interview with the Journal, Mr. Brett said his strategy was to expand J.Crew’s assortment with more entry-level prices, as well as plus sizes and more fit options. He was also expanding J.Crew’s stylesthrough subbrands and striking deals to sell clothing at other retailers. In August, the J.Crew brand snapped a four-year slump, posting a slight gain in quarterly sales at its existing stores and websites.

In the November 29 memo, J.Crew said it would exit the home goods business and phase out some subbrands “in the interest of creating greater clarity for consumers.” It will hire a new head of its outlet business, while Aaron Rose, who was hired by Mr. Brett as chief of emerging business and value brands, will be leaving the company. Geren Lockhart, head of emerging brands, is also leaving.

Mr. Brett had wanted to launch other brands and expand the lower-priced Mercantile brand in a bid to reach a more diverse group of customers. The moves became the subject of disagreement with the board, which includes long time J.Crew Chairman Millard “Mickey” Drexler and private equity-backers TPG Capital and Leonard Green & Partners. The dispute came to a head at a board meeting in recent weeks where Mr. Brett clashed with directors over their concerns about operating earnings, the Journal previously reported.