(FORTUNE Magazine) – Once we lived in a world of pinks, browns, and grays. Then came J. Crew, and we learned to see these colors as petal, root, and storm. And it wasn't just the color names that were different. Everything about J. Crew's world was lovelier--the clean beaches, the endless weekends, and the young, beautiful people frolicking with their young, beautiful friends.

But for years the business behind the glossy catalog was less than idyllic. Hampered by high costs and revolving-door management, J. Crew was much better at defining a look than at turning a profit. That's why it's remarkable that in a season when powerhouse retailers like the Gap are hurting, J. Crew has emerged as one of the strongest clothing businesses around. "They're the envy of the industry," says Kurt Barnard of Barnard's Retail Trend Report. "They're doing well, and most apparel retailers are not."

J. Crew sells more clothes per square foot in its stores than its preppy lifestyle competitors Gap, Abercrombie & Fitch, and Ann Taylor. Its same-store sales were up nearly 10% in the all-important month of September, while Gap's and Abercrombie's were down. Its Internet business is one of the industry's strongest. And it has a lot of room to grow: While J. Crew's name recognition rivals the Gap's, the company has only 103 stores, compared with Gap's 1,995 (in the U.S.).

J. Crew's comeback follows a leveraged buyout by venture firm Texas Pacific Group, which is known for turning around underperforming companies like Continental Airlines and Beringer wines. Three years ago, TPG bought 60% of J. Crew from its founder, the brilliant but demanding Arthur Cinader, now 73, and his equally formidable daughter Emily Cinader Woods, 39, who retains the title of chairman but has stepped out of day-to-day management. TPG helped replace the Cinaders, who were marketing geniuses but often management nightmares, with Mark Sarvary, a guy who 18 months ago was running Nestle's frozen-foods division.

To understand what the polite, British-born Sarvary has done with J. Crew, it helps to know something about its history and the family behind it. J. Crew began when Arthur Cinader, who had inherited a lower-end catalog called Popular Fan Club, decided in the early '80s to start a new business. The Official Preppy Handbook had just come out, and Ralph Lauren was selling truckloads of his landed gentry look, says Ted Pamperin, an industry veteran hired by Cinader to help create a new catalog. The plan, Pamperin says, was to sell Ralph Lauren-style clothes at half the price. Since Lauren had already claimed the preppy sport of polo, they took crew, adding the "J" because it looked and sounded good.

But none of that would have propelled J. Crew to the status it attained if it weren't for the catalog. Using magazine-style photography, with full-page shots of models who seemed caught in playful moments, it was nothing like its unsexy predecessors from J.C. Penney or L.L. Bean. The first catalogs, which premiered in 1983, were shot on beaches or down by the docks at Ivy League schools, often using models found on the campuses. "Whew! Some of those men!" recalls Sherry Chiger, editor of Catalog Age. "The way you saw them playing beach volleyball: They were accessible because they weren't styled perfectly--they had a little bit of sand on their knees. It was glamorized real life."

And it sold the product extremely effectively. Emily, who joined the company after graduating from the University of Denver in 1982, says she remembers an early catalog that featured a plain pocket T-shirt. While the catalog offered several different colors, it showed the model wearing one in petal. Knowing that the color featured on the model would sell the best, "I ordered 5,000 shirts in petal from our manufacturers," she says. "We got orders for 80,000." In its first year of business, J. Crew sold $3 million; by 1989 sales of the J. Crew brand were a reported $160 million. That year Arthur Cinader bragged to the New York Times, "Wives of investment bankers talk about the latest J. Crew catalog the way they talk about shopping at Bergdorf's."

To the Cinaders, J. Crew had become more than just another spinoff. "The attitude of Arthur Cinader was that as the business matured and became more important, he saw it more and more as an expression of his success, and was less short-term-profit oriented," recalls Pamperin. "We were spending a disproportionately large part of the budget on the product development and design staff, and we were investing more proportionally in models and photography." They shot more film than might have been cost-effective, Pamperin says, because Arthur and Emily cared as much about making things perfect as they did about what it cost to achieve perfection. When a shot was even slightly flawed, they didn't hesitate to reshoot. After all, this was more than just a business: Emily's sister Abigail had appeared in the catalog, and one of the best-selling items was an anorak that Emily had designed after the jacket her father was wearing when he first met her mother, on a ski trip in Switzerland.

The Cinader family's personal involvement with J. Crew became the best and worst things about the business. Their talent made J. Crew strong, with Arthur employing his brainy, witty style in catalog copy, and Emily, whose eye for style was evident from the days when she covered her boarding-school walls with pages from fashion magazines, demonstrating a remarkable talent at J. Crew-style design. But their passion came at a price. Not only was their relative disregard to costs a hindrance, but so was their management style. Former colleagues remember Arthur's ending a meeting in anger because a subordinate had presented a report titled "SPR 94" instead of "SP 94," Arthur's preferred abbreviation for "spring." "If you didn't have a level of confidence, or if you weren't really willing to commit the intellectual muscle, I would say you would find him difficult to work for," says Arnold Cohen, who was with J. Crew from 1988 to 1993, when he retired as president, in part, he says, because, "with it being privately held and controlled by the founder and his daughter, I had done as much as I could to influence the culture of the company." J. Crew went for half a year without an official operating head, until Cinader hired former Liz Claiborne executive Robert Bernard. He lasted about three years, during which revenues rose (to $809 million in 1996), but profits dropped (to $12.5 million). By early 1997 the president's job stood empty again.

Realizing that the catalog market was hitting a wall, the family started looking for capital to expand its lucrative retail business. At the same time, some members of the family wanted to cash out. That's why the Cinaders decided to sell for $560 million. Texas Pacific Group got 60% of the company; the older generation of Cinaders, including Arthur, took its money and retired, while Emily gained the title of chairman and 19% of the company.

It's hard to recognize the troubled J. Crew of 1997 in its envy-inducing performance today. And at first glance it's hard to see what Mark Sarvary, a guy who was not long ago touting the improved Parmesan flavor in Lean Cuisine's chicken fettuccine, has in common with J. Crew. "Well, I like clothes," he jokes while giving a tour of the company's Greenwich Village headquarters. "I've always worn them." But as Emily Woods says warmly, "He got J. Crew. He really got it." (Terribly important in a company that employees have joked is a cult.) She and Texas Pacific Group hired Sarvary, who had worked with TPG partner Dick Boyce at the San Francisco office of the consulting firm Bain & Co.

Sarvary understood that he had to take the powerful brand the Cinaders had created and give it the room and focus to grow (first, by getting rid of some tangential catalog businesses). And he realized that while the core J. Crew catalog might never again be a huge growth engine, it nevertheless served as the best advertisement for the J. Crew fantasy. Even better, the company's years as a combination catalog and retail company made it a natural when it came to selling over the Web. (Emily's brother, Arthur Jr., launched the Website in his living room in 1996.) After all, J. Crew had been picking, packing, and shipping merchandise for years. "Many people talk about being multichannel retailers," Sarvary says. "We just are."

Fourteen percent of J. Crew's sales now come via the Web--vs. 22% through the catalog--and transactions cost the company a fraction as much through the Web as through the catalog. Part of the success of the Website comes from the fact that the site looks and feels so J. Crew, says Darrell Rigby, head of retail consulting at Bain. Lehman Brothers estimates that this year the Website should bring in more than $130 million in sales.

But Sarvary's biggest revenue builder has been retail stores, which are now 64% of the business and growing. He added 16 new stores in 1999 and another 23 so far this year, bringing the total to 103. (At the same time, Sarvary has reduced the costs of building new stores from $184 to $132 a square foot.) He plans to add 30 more next year and to increase the number of stores by 30% a year for the foreseeable future. His reasoning is easy to understand. The average J. Crew store brings in $4.4 million a year and turns an unusually high profit of 26% at the store level.

"They're on top of their market, and stores like the Gap aren't right now," says Lehman analyst Susan Jansen. She points out that J. Crew, by steering away from extreme looks (such as Banana Republic's recent push into everything purple), maintains a steady comparable-store growth rate of between 3% and 5% a year. Although J. Crew appeals to a largely young crowd--"Our sweet spot is someone of about 28," says Sarvary--it doesn't get swept up in fashion trends as much as the once hot Abercrombie & Fitch, whose boxy sweaters fell out of favor with young women when fashion suddenly switched to the fitted and feminine. (In June 1999, Abercrombie's same-store sales were up 18%; a year later they had dropped 14%.) "They rode the youth wave up, and now they're riding it down," says Bain's Rigby.

What excites analysts about J. Crew's winning formula is that there's so much room to expand it. "We're vastly underpenetrated," Sarvary says. "There are about 300 prime locations to open stores in the U.S. We're only in 103 of them." If that growth should wane, there are always line extensions. Gap has had success with kids' clothes; Banana Republic has a housewares line. J. Crew had done virtually none of that before it introduced bath and body products this fall. And Sarvary says there's certainly the possibility of international expansion (it's currently using its $90 million licensing business in Japan as a kind of test lab), even if he's concentrating on the U.S. now.

So while the company's earnings are still in negative territory because of interest on the debt it took on in the 1997 buyout, cash flow (defined as earnings before deductions for interest, taxes, depreciation, and amortization) has nearly tripled since 1997, from $26.5 million to $78 million this year, estimates Lehman's Jansen, who says 2000 revenues should hit $788 million.

Not bad for a guy who, two years ago, knew more about TV dinners than the difference between petal and root. "Mark constantly gets harassed with 'You don't come from the industry,' " says J. Crew President Trudy Sullivan, who recently returned to the company after leaving to head Kids "R" Us. "But maybe that's good, because retailers aren't known for their innovative management. J. Crew has always been a company that's done the hard things well and the easy things not so well. We have a tremendous brand, but the business processes and the operational processes have been a learning curve for us." Mark Sarvary has put this business ahead of the curve.

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