Robert W. Baird downgraded rating of J. Crew Group, Inc. (JCG) to 'neutral' from 'outperform' as it sees limited upside following its guidance revision and buyout agreement. The brokerage lowered its price target on shares of the apparel retailer to $45 from $46.

J. Crew Group said it agreed to be acquired by private equity firms TPG Capital and Leonard Green & Partners, L.P. for $43.50 a share in cash or total of about $3.0 billion. Millard Drexler will remain chairman and chief executive officer, and maintain a significant equity stake.

The company also reported its third quarter profit of $37.8 million or 58 cents a share, down from $43.9 million or 67 cents a share last year. Revenue rose 4 percent to $429.3 million. Wall Street had expected profit of 54 cents a share on revenue of $430.89 million. Comparable store sales decreased 1 percent.

J. Crew Group lowered its fiscal 2010 earnings guidance to $2.08 to $2.13 a share from previous forecast of $2.25 to $2.35 a share. Street expects profit of $2.24 a share.

Robert W. Baird analyst Erika Maschmeyer said the company's lowered outlook implies fourth quarter earnings of 30 cents to 35 cents a share (consensus 49 cents a share), on lower projections for gross margin (down 600 to 700 basis points; higher inventory).

While competing bids may emerge during the go-shop period, we view TPG as the likely buyer (given the historical relationship), with potential for a slightly higher negotiated offer price. While competing bids may emerge during the go-shop period, a challenging near-term outlook (Q4 guidance lowered significantly) could limit upside to the purchase price, said Maschmeyer.

Maschmeyer said the 'Go-shop' provision extends through January 15. If no superior offer emerges, the transaction is expected to close in first half of 2011. TPG previously acquired JCG in 1997 (from founders) and took it public in 2006. A founding partner at TPG is the longest serving director of JCG.

We see potential for 300 J.Crew retail and 100 factory stores in the U.S., plus potential for 10-15 stores in Canada, 35 Crewcuts sites, and Madewell expansion. After growing units at a 13.9 percent CAGR from 2005-2008, JCG deliberately slowed growth to 7.0 percent in 2009 and plans unit expansion of 4.4 percent in 2010. Management plans to reaccelerate store growth in 2011 (mid-single-digit square-footage growth, excluding Madewell), said Maschmeyer.

The brokerage reduced its 2010 EPS estimate for J. Crew Group to $2.12 from $2.28, and its 2011 estimate to $2.35 from $2.57.

J. Crew Group shares closed Tuesday's regular trading session up 16.84 percent at $43.99. However, in the after-hours, the stock fell 0.36 percent to $43.83 on the NYSE.

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