He was the boy wonder of retailing. Then he went down in flames. Now Gap's former CEO has resus-citated J. CREW with some hard-won knowledge: Bigger isn't always better.

(FORTUNE Magazine) – WHEN A FORTUNE 500 CEO IS OUSTED, he usually pockets a massive severance check and retreats to golfing, "consulting," and shopping for a third wife. Mickey Drexler did the opposite. When Gap Inc. booted the longtime chief in 2002 amid plummeting profits, he turned down a multimillion-dollar severance package because it contained a noncompete clause. Within months he had packed his bags for New York City (temporarily leaving his wife of 36 years and preteen daughter back in San Francisco) to run J. Crew, a then-lackluster clothing purveyor just one-twentieth Gap's size. Some snickered. They're not laughing now. J. Crew recently announced competition-crushing results for the crucial fourth quarter. Same-store sales--the most watched measure in retailing--rose 17%, vs. a 3% loss for Gap (see chart). Operating income leaped to $20 million from $1 million in the fourth quarter of 2003. With results like that, the privately held J. Crew is virtually certain to go public in the next year or so--unless the stock market tanks--making the already rich Drexler, 60, still richer.

Drexler's success at J. Crew pegs him as that rare CEO who has truly learned from his mistakes. At Gap he opened new stores way too fast; in two years at J. Crew he has closed seven and opened just nine. At Gap he made sure stores were bountifully stocked; at J. Crew he cultivates scarcity. At Gap he spent hundreds of millions a year on TV commercials and other ads; at J. Crew he continues the company tradition of not advertising at all. Most important, in his later years at Gap he cranked out racks of too trendy clothes; at J. Crew he's all about the classics. "I'm thrilled about our results," Drexler says, though he won't comment on an IPO. "For a company that has been in a slump for so many years to come out of the doldrums--I can't tell you how exciting that feels."

The excitement is shared by Texas Pacific Group, a private-equity partnership run by David Bonderman that specializes in buying struggling companies, turning them around, and taking them public (see "One False Move" on fortune.com). Back in 1997, TPG bought a controlling stake in J. Crew from company founders Emily Woods and her father, Arthur Cinader, for $560 million. It cycled through three CEOs in five years, with sales and product quality falling all the while. Says Jim Coulter, a founding partner at TPG and a J. Crew director: "There are only a handful of people in the world that do specialty retail well, and we didn't have one. Now we do."

The Bronx-raised son of a textile buyer, Drexler was president of women's wear chain Ann Taylor when Gap founder Donald Fisher hired him to run the Gap chain in 1983. Drexler, who became CEO of Gap Inc. in 1995, engineered one of the great turnarounds in retail history: He banished non-Gap brands, cranked out acres of big-selling basics, reinvented Banana Republic (which Gap had acquired in 1983), and launched Old Navy. From 1983 to the end of 2000, Gap's revenues rose from $480 million to $13.7 billion, and its stock soared 169-fold. But then the Mickey magic stopped working. Starting in 2000, same-store sales fell every quarter for two years, the stock plunged more than 75%, and Gap's debt was downgraded to junk in early 2002. Drexler left later that year.

Coulter saw past Drexler's recent blunders. To get him onboard, Coulter agreed to let Drexler invest $10 million in the company. Thanks to additional stock grants, Drexler now owns 22% of J. Crew, making him the largest individual shareholder. (TPG owns 58%.) "There's nothing like having risk and ownership and downside," exults Drexler, who has jettisoned his former white-shirt-and-jeans uniform for a navy J. Crew cashmere blazer and Tods suede lace-ups. "I felt like an employee at Gap," he continues. "My biggest mistake was not getting out earlier. It wasn't too big for me to run, [but] it was too big for me to have fun, to influence the product to the level that I like to. Managing managers is not as much fun as managing product and customers."

Drexler's habit of micromanaging, a style that proved deadly at a company as vast as $15 billion Gap, was just what the $804 million J. Crew needed. He converted a central conference room in J. Crew's Manhattan headquarters into his office so that he could keep an eye on his employees. Like an anxious high school principal, he barks questions and commands over the company's loudspeaker every ten minutes--"Any update on the new galoshes?" "Anyone who has anything to do with suit quality, come to my office right now!" He tinkers with catalog captions. He obsessively visits J. Crew stores and chastises managers for less-than-artful displays. ("Being nice and not hurting anyone's feelings aren't on the top of Mickey's list," says a Gap exec who worked for him.) "I'm a storekeeper," Drexler explains in his rapid-fire fashion. "I keep the store, I keep the product, I'm involved in everything that you as a customer see."

Fixing the product mix was Drexler's most immediate task. First, he dumped all the trend-driven togs, such as velour one-shouldered tops, no matter how popular they were. "Mickey had no fear," says Jenna Lyons, J. Crew's longtime women's wear director. "We cut the cord on some million-dollar-volume items." In their place, he resurrected many of the preppy staples the company had been known for, such as $52 madras shorts, $88 seersucker pants, and $158 barn jackets. Second, he stirred in more luxurious pieces: $148 Italian-made kitten-heel pumps, $248 cashmere sweaters, $498 men's cashmere blazers. While pricier than J. Crew's usual fare, they were significantly cheaper than similar designer offerings. As Drexler tells it, part of his motivation was simple outrage. "I have always been astounded by the extraordinarily high prices of designer merchandise," he says. "The prices aren't logical."

To keep costs down for its higher-end offerings, J. Crew buys cashmere in bulk from Italy's famed Loro Piana factory, then ships it to Hong Kong to be sewn. The shoes are produced by Italian factories that also make leather goods for the likes of Prada and Gucci, but they're priced less expensively, in part because J. Crew--which is both designer and retailer--has no middleman. The pieces, sold in only about half of J. Crew's 158 stores, were an immediate hit. Blazers now bring in almost as much money as J. Crew's long-established sweater business, says Tracy Gardner, the head of merchandising (and a former Gap exec), though she won't reveal the amount.

Last fall J. Crew began pushing luxury still further. It started offering super- premium products--such as $1,500 cashmere coats and $1,500 beaded tunics--in limited editions, sometimes no more than 100 pieces nationwide. Many sold out within weeks. Vogue market editor Meredith Melling Burke applauds the strategy: "Americans are mixing the high end with things that are more affordable. [At] J. Crew you can have the high-low moment in a one-stop-shopping experience."

Limited editions, of course, tap into the frisson of scarcity. "Shoppers know they've got to buy it when they see it," says president Jeff Pfeifle, another former Gap exec. To encourage this mindset for J. Crew's entire product line, Drexler has drastically tightened inventories. That means popular items like $190 beaded sandals frequently sell out, often to the dismay of the company's store managers. Drexler is unmoved. "It's like having stale food in a supermarket. You can't. You've got to sell out early!" he told them in a recent conference call. Tighter inventories mean that J. Crew is no longer stuck putting reams of clothes on sale, a move that kills profit margins and trains shoppers to wait for discounts. At one point before Drexler got there, half of J. Crew's clothing sold at a discount. Today only a small percentage of it does.

Just because Drexler is keeping inventories lean doesn't mean he's not introducing lots of new merchandise. He's expanding a bridal collection launched last spring that now includes ten bridesmaid outfits (price: $130 to $425) and four bridal gowns ($260 to $550). This month J. Crew will start selling a higher-end gown made of the same Italian Clerici duchesse satin that Vera Wang and Chanel frequently use. Vera Wang's Clerici satin gowns start at about $5,000; J. Crew's will cost $1,800. (Don't look for the dresses in stores: They're sold only by catalog and online, though the company is holding trunk shows around the country this spring.) What's more, this summer J. Crew will introduce a jewelry line that ranges from $45 sterling-silver charms to $1,000 18-karat gold charm bracelets. This holiday season it will relaunch Crew Cuts, a line of kids' clothes that existed briefly in the '90s. And Drexler says coyly that he's working on a top-secret standalone retail concept for 2006 (he recently hired a former Calvin Klein exec for the project), but he won't provide details.

If there's anything that gives the manic Drexler pause, it's the idea of growth. He seems almost traumatized by Gap's disastrous overexpansion in his last few years there. He'll open only four more J. Crew retail stores and five factory stores this year. The pace will then accelerate: Drexler says the company plans to double the number of stores in the next five to six years. "I'm all for growth, but I'm not for growth for the sake of growing," he says. "I think big is the enemy. As companies get larger, the layers automatically get built in, the speed slows down, the decision-making slows down, and it just makes you less efficient."

Spoken like a man with enough self-knowledge to accept that maybe he and huge companies just don't mix. "If J. Crew gets very large and remains very profitable, I'll be very happy about that," he says cheerfully. "I'm just not sure that I'll be the one running it at that point." How many other CEOs would say the same? ■

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