Document:

<PAGE>

                                                                 Exhibit 10.5(b)
                                                                 ---------------

                                            August 9, 1999

Mr. Mark Sarvary
Chief Executive Officer
J. Crew Group, Inc.
770 Broadway
New York, NY 10003

Dear Mark:

          Pursuant to our recent discussions regarding the loan which J. Crew
Operating Corp. (the "Company") will make to you in accordance with Section 2(g)
                      -------
of the Employment Agreement dated as of May 3, 1999, among the Company, J. Crew
Group, Inc. and you, we thought it would be useful to lay out certain material
terms and conditions of such loan in this letter for both parties to sign.

I.  The Company Loan

          Immediately prior to the closing of the purchase of your proposed
primary residence (the "Closing"), the Company will lend you one million dollars
                        -------
($1,000,000) (the "Company Loan") to be used by you for the sole purpose of
                   ------------
purchasing your primary residence, located at 7 Fox Run, Purchase, New York (the
"Property").  It is understood that the funding of the Company Loan will take
 --------
place immediately prior to the Closing and will be initially secured by your
pledge to the Company of certain stock options (the "Stock Options") pursuant to
                                                     -------------
the Pledge and Security Agreement to be executed by you, a copy of which is
attached heret as Exhibit B.  Immediately following the Closing, you will grant
the Company a second mortgage on the Property to secure the Company Loan by
executing a second mortgage agreement substantially in the form attached hereto
as Exhibit C (the "Second Mortgage"), and the Company will release its security
                   ---------------
interest in the Stock Options.

II.  Terms and Conditions of the Company Loan

          A.  The obligation of the Company to make the Company Loan is subject
to your providing evidence satisfactory to the Company on the date of the
Closing that:

          (1)  the sum of (x) the Company Loan and (y) the loan to be obtained
     by you from Citibank, N.A. in connection with the purchase of the Property,
     which loan will be secured by a first mortgage on the Property (the "First
                                                                          -----
     Mortgage Loan"), does not exceed ninety percent (90%) of the fair market
     -------------
     value of the Property as appraised by Citibank, N.A. in connection with the
     First Mortgage Loan (a copy of such appraisal to be provided to the Company
     at the Closing);
<PAGE>

          (2)  there are no liens on the Property other than the lien created by
     the First Mortgage Loan (or other items acceptable to the Company
     identified on the Citibank, N.A. lender's title insurance policy, a copy of
     which you will provide to the Company); and

          (3)  The terms and conditions of the First Mortgage Loan do not
     prohibit the Second Mortgage.

          B.  As consideration for the Company making the Company Loan, you
agree that:

          (1) Contemporaneously with the making of the Company Loan, you will
     execute the Promissory Note and the Pledge and Security Agreement,
     substantially in the forms attached hereto as Exhibit A and Exhibit B,
     respectively;

          (2)  You will execute the Second Mortgage in the form attached hereto
     as Exhibit C immediately following the Closing and the Company shall record
     the same in the applicable recording office;

          (3)  You will not grant any liens on the Property without the prior
     written consent of the Company (other than the lien securing the First
     Mortgage Loan); and

          (4)  In the event the Closing does not occur on the date the Company
     makes the Company Loan to you, you will immediately repay the Company Loan
     to the Company.

          If the foregoing correctly reflects your understanding, please sign
the enclosed copy of this letter and return it to me.

                                              Sincerely,

                                              Emily Woods

Agreed to and accepted:

___________________________
Mark Sarvary
Date:
<PAGE>

                                PROMISSORY NOTE

$1,000,000.00                                                    New York, NY
                                                                 August __, 1999

     Mark Sarvary ("Sarvary"), for value received, hereby promises to pay to the
order of J.Crew Operating Corp., a Delaware corporation ("J.Crew"), at its
offices located at 770 Broadway, New York, NY, 10003, or such other place as the
holder hereof may designate by notice to Sarvary, the principal amount of One
Million Dollars ($1,000,000.00), in lawful money of the United States, without
interest, as follows:  (i) $50,000.00 on April 15th in each of the years 2000,
2001, 2002 and 2003; and (ii) the remaining balance of $800,000.00 on June 29,
2004.  Sarvary hereby grants J.Crew the right to deduct all or a portion of the
principal payments when due from any bonus payable to him.  Sarvary acknowledges
and confirms that (i) J.Crew has loaned Sarvary the principal amount of the Note
for the sole purpose of Sarvary purchasing a primary residence located at 7 Fox
Run, Purchase, New York (the "Property") and (ii) he will use the proceeds of
the Note solely for such purpose.

1.   Prepayment
     ----------

     This Note may be prepaid at any time, in whole or in part, without penalty
or premium.  Each partial prepayment shall be applied to installments of
principal in inverse order of maturity.

2.   Events of Acceleration
     ----------------------

     The holder of this Note, by written notice to Sarvary, may declare the
entire principal amount immediately due and payable if any of the following
events ("Accelerated Events") shall have occurred and be continuing, in which
event the maturity of the then unpaid balance of the Note shall be accelerated
and shall become immediately due and payable, without presentment, demand,
protest or notice of any kind, all of which are hereby expressly waived in
accordance with Paragraph 3(f) hereunder.

     (a) Sarvary shall not have paid any installment of principal on this Note
as and when it has become due and payable and such default shall continue for a
period of 10 days after notice to Sarvary;

     (b) Sarvary's employment with J.Crew is terminated for any reason; or

     (c) Sarvary is in default under any other agreement with J.Crew.

     3.  Miscellaneous
         -------------

     (a) Sarvary shall pay all costs and expenses incurred by the holder in
connection with the collection of the Note, including reasonable attorneys'
fees.

     (b) This Note shall be governed by and construed in accordance with the
laws of New York State applicable to agreements made and to be performed therein
and cannot be changed orally. Sarvary irrevocably consents to the sole and
exclusive jurisdiction of the courts of New
<PAGE>

York State and of any federal court located in New York State in connection with
any action or proceeding arising out of or related to this Note.

     (c) No delay or failure on the part of the holder of this Note to exercise
any power or right given under this Notice, including, but not limited to, the
right to accelerate the amounts due, shall operate as a waiver of the power or
right and no right or remedy of the holder shall be deemed abridged or modified
by any course of conduct. All rights and remedies existing hereunder are
cumulative and not exclusive of each other or any rights or remedies otherwise
available.

     (d) All notices and other communications hereunder shall be in writing and
shall be deemed given when delivered personally, three days after being mailed
by registered mail, return receipt requested, or the following day if sent by
overnight courier service, to J.Crew at the address set forth at the beginning
of this Note, attn: General Counsel, and to Sarvary at 770 Broadway, New York,
NY 10003, or such other address as either party may specify by notice given
pursuant hereto.

     (e) To the extent permitted by applicable law, Sarvary hereby waives all
benefit that might accrue by virtue of any present or future moratorium laws
exempting any of the Property, or any other property, real or personal, or any
part of the proceeds arising from any sale of any such property, from
attachment, levy, or sale under execution, or providing for any stay of
execution to be issued on any judgment recovered on this Note (excepting only
any stay of execution).

     (f) SARVARY HEREBY WAIVES PRESENTMENT, DEMAND, DILIGENCE, PROTEST AND
NOTICE OF PROTEST, NOTICE OF INTENT TO ACCELERATE, NOTICE OF ACCELERATION,
DEMAND, DISHONOR AND NON-PAYMENT OF THIS NOTE OR ANY OTHER NOTICE OF ANY KIND
WHATSOEVER.

     (g) If any term or provision of this Note or the application thereof to any
circumstance shall, to any extent, be invalid, illegal or unenforceable, such
term or such provisions shall be ineffective to the extent of such invalidity,
illegality or unenforceability without invalidating or rendering unenforceable
any remaining terms and provisions hereof or thereof or the application of such
term or provision to circumstances other than those as to which it is held
invalid, illegal or unenforceable.

     (h) This Note shall not be transferable, except that J.Crew may transfer
the Note to any other person or entity without Sarvary's consent.

                                  ___________________________
                                          Mark Sarvary

                                       2
<PAGE>

Exhibit "B"
-----------

                         PLEDGE AND SECURITY AGREEMENT

          This PLEDGE AND SECURITY AGREEMENT (as amended, restated, replaced,
supplemented or otherwise modified from time to time, this "Agreement") is dated
                                                            ---------
as of August __, 1999 and entered into by and between Mark Sarvary, in his
individual capacity, ("Grantor") and J.Crew Operating Corp., (together with it
                       -------
successors and assigns, "Secured Party").
                         -------------

                             PRELIMINARY STATEMENTS

          WHEREAS, Secured Party has agreed to loan Grantor the principal amount
of $1,000,000 (the "Loan") in accordance with that certain Promissory Note made
                    ----
by Grantor, dated as of the date hereof (as the same may be amended, restated,
supplemented or otherwise modified from time to time, the "Note") and in
                                                           ----
accordance with that certain letter agreement between the parties, dated August
9, 1999 (the "Letter Agreement") in order to finance Grantor's acquisition of a
              ----------------
certain property located at 7 Fox Run, Purchase, NY 10577 (the "Property");
                                                                --------

          WHEREAS, Grantor is the legal and beneficial owner of those certain
options to purchase 272,000 shares of the common stock of J.Crew Group, Inc.
awarded to him under the J.Crew Group, Inc. 1997 Stock Option Plan (such options
and such plan, the "Pledged Options" and the "Option Plan", respectively) and
                    ---------------           -----------
evidenced by that certain Stock Option Agreement dated as of June 28, 1999 (the
"Option Agreement");
 ----------------

          WHEREAS, it is a condition precedent to the making of the Loan by
Secured Party that Grantor shall have granted the security interests and
undertaken the obligations contemplated by this Agreement; and

          WHEREAS, it is intended that the security interest granted hereunder
secure the Loan until the closing of Grantor's purchase of the Property, at
which time Grantor shall grant to Secured Party a second mortgage on the
Property, substantially in the form agreed to in the Letter Agreement (the
"Second Mortgage"), after which this Agreement shall terminate.
----------------

          NOW, THEREFORE, in consideration of the premises and in order to
induce Secured Party to make the Loan and for other good and valuable
consideration, the receipt and adequacy of which are hereby conclusively
acknowledged, Grantor hereby agrees with Secured Party as follows:

          SECTION 1.  Grant and Pledge of Security.  Grantor hereby assigns and
                      ----------------------------
pledges to Secured Party, and hereby grants to Secured Party a security interest
in, all of Grantor's right, title and interest in and to the following, whether
now or hereafter acquired (the "Pledged Collateral") the Option Agreement,
                                ------------------
Pledged Options, and any interest of the Grantor in the entries on the books of
J.Crew Group, Inc. or any financial intermediary pertaining to the Pledged
Options, and all dividends, cash, warrants, rights, instruments and other
property or proceeds from time to time received, receivable or otherwise
distributable in respect of or in exchange for any or all of the Pledged
Options.  The Grantor shall deliver the original Option
<PAGE>

Agreement to the Secured Party and such Option Agreement shall remain in the
possession of the Secured Party until this Agreement is terminated, at which
time, the Secured Party shall return the Option Agreement to the Grantor.

          SECTION 2.  Security for Obligations.  This Agreement secures, and the
                      ------------------------
Pledged Collateral is collateral security for, all obligations of every nature
of the Grantor now or hereafter existing under the Note and the Letter Agreement
(all such obligations collectively, the "Secured Obligations").
                                         -------------------

          SECTION 3.  No Assumption.  Notwithstanding any of the foregoing, this
                      -------------
Agreement shall not in any way be deemed to obligate Secured Party to assume any
of Grantor's obligations, duties, expenses or liabilities now existing or
hereafter drafted or executed (collectively, the "Grantor Obligations") unless
                                                  ------- -----------
Secured Party or any such purchaser otherwise expressly agrees to assume any or
all of such Grantor Obligations in writing.

          SECTION 4.  Further Assurances and Covenants of Grantor.  Grantor
                      -------------------------------------------
agrees that from time to time, at the expense of Grantor, Grantor will promptly
execute and deliver all further instruments and documents, and take all further
action, that may be necessary or desirable, or that Secured Party may reasonable
request, in order to perfect and protect any security interest granted or
purported to be granted hereby or to enable Secured Party to exercise and
enforce its rights and remedies hereunder with respect to any Pledged
Collateral.  Grantor shall not, without the prior written consent of Secured
Party, which may be granted or withheld in Secured Party's sole discretion,
sell, assign (by operation of law or otherwise), pledge or otherwise dispose of
or hypothecate all or any part of the Pledged Collateral.

          SECTION 5.  Acceleration Event.  In the case of an Acceleration Event,
                      ------------------
as defined in the Note, in addition to all of Secured Party's other rights and
remedies, Secured Party shall have the right, upon five days prior notice to
Grantor, to cause J. Crew Group, Inc. to cancel all or any portion of the
Pledged Option and to apply the "Spread" (as defined below) on each of the
                                 ------
shares of Common Stock underlying the vested Pledged Option which Secured Party
elects to cancel as follows: (i) first to pay Secured Party's expenses
(including reasonable attorney's fees) in connection with collection of the
Note; (ii) second, to apply so much of the remaining Spread as may be necessary
to pay the unpaid principal of the Note; and (iii) third, to pay any remaining
amount of the spread to Grantor.  As used herein, the term "Spread" means the
difference obtained by subtracting the (a) exercise price per share underlying
the Pledged Option, from (b) the Fair Market Value (as defined in the Option
Plan) of a share of J.Crew Group, Inc. Common Stock determined as of the date on
which the Option is cancelled.

          SECTION 6.  Substitution of Pledged Collateral.  In accordance with
                      ----------------------------------
the Letter Agreement, upon Grantor's execution and grant of the Second Mortgage
on the Property and the recordation of such Second Mortgage, the Pledged
Collateral hereunder shall be released to the Grantor and this Agreement shall
terminate.

          SECTION 7.  Continuing Security Interest; Transfer of Loan.  This
                      ----------------------------------------------
Agreement shall create a continuing security interest in the Pledged Collateral
and shall (a) remain in full force and effect until the indefeasible payment in
full of the Secured Obligations or granting and recordation of the Second
Mortgage, (b) be binding upon Grantor, its

                                       2
<PAGE>

successors and assigns, and (c) inure, together with the rights and remedies of
Secured Party hereunder, to the benefit of Secured Party and its successors,
transferees and assigns. Without limiting the generality of the foregoing clause
(c), Secured Party may assign or otherwise transfer the Note to any other
Person, and such other Person shall thereupon become vested with all the
benefits in respect thereof granted to Secured Party herein or otherwise. Upon
the indefeasible payment in full of all Secured Obligations or the granting by
Grantor of the Second Mortgage on the Property (as described above), the
security interest granted hereby shall terminate and all rights to the Pledged
Collateral shall revert to Grantor.

          SECTION 8.  Amendments; Etc.  No amendment, modification, termination
                      ---------------
or waiver of any provision of this Agreement, or consent to any departure by
Grantor herefrom, shall in any event be effective unless the same shall be in
writing and signed by Secured Party, and, in the case of any such amendment or
modification by Grantor, such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which it was given.

          SECTION 9.  Notices.  Any notice or other communication herein
                      -------
required or permitted to be given hereunder shall be given in accordance with
Section 4(d) of the Note.

          SECTION 10.  Failure or Indulgence Not Waiver; Remedies Cumulative.
                       -----------------------------------------------------
No failure or delay on the part of Secured Party in the exercise of any power,
right or privilege hereunder shall impair such power, right, privilege or option
or be construed to be a waiver of any default or acquiescence therein, nor shall
any single or partial exercise of any such power, right, privilege or option
preclude any other or further exercise thereof or of any other power, right,
privilege or option.  All rights and remedies existing under this Agreement are
cumulative to, and not exclusive of, any rights or remedies otherwise available.

          SECTION 11.  Severability.  In case any provision in or obligation
                       ------------
under this Agreement shall be invalid, illegal or unenforceable in any
jurisdiction, the validity, legality and enforceability of the remaining
provisions or obligations, or of such provision or obligation in any other
jurisdiction, shall not in any way be affected or impaired thereby.

          SECTION 12.  Headings.  Section and subsection headings in this
                       --------
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose or be given any
substantive effect.

          SECTION 13.  Governing Law; Terms.  THIS AGREEMENT AND THE RIGHTS AND
                       --------------------
OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

          SECTION 14.  Consent to Jurisdiction and Service of Process.  The
                       ----------------------------------------------
provisions of Section 4(b) of the Note are hereby incorporated by reference in
their entirety.

          SECTION 15.  Waiver of Jury Trial.  The provisions of Section 4(f) of
                       --------------------
the Note are hereby incorporated by reference in their entirety.

          SECTION 16.  Counterparts.  This Agreement may be executed in one or
                       ------------
more counterparts and by different parties hereto in separate counterparts, each
of which when so

                                       3
<PAGE>

executed and delivered shall be deemed an original, but all such counterparts
together shall constitute but one and the same instrument; signature pages may
be detached from multiple separate counterparts and attached to a single
counterpart so that all signature pages are physically attached to the same
document.

                  [Remainder of page intentionally left blank]

                                       4
<PAGE>

          IN WITNESS WHEREOF, Grantor and Secured Party have caused this
Agreement to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date first written above.

GRANTOR:                                Mark Sarvary, in his individual capacity

                                        By:
                                            ----------------------------
                                            Name:
                                            Title:

SECURED PARTY:                          J.Crew Operating Corp., a Delaware
                                                          Corporation

                                        By:
                                            ----------------------------
                                            Name:
                                            Title:

                                       5<PAGE>

                                                                    Exhibit 10.6
                                                                    ------------

                                LETTER AGREEMENT

September 24, 1999

Ms. Carol Sharpe
6 Eno Lane
Westport, CT 06880

Dear Carol:

          Pursuant to our discussions and our letter dated March 23, 1999
regarding your employment with J. Crew Operating Corp. (the "Company"), we
                                                             -------
thought it would be useful to lay out the terms and conditions of our agreement
in this letter agreement ("Agreement") for both parties to sign.
                           ---------

1.  Employment.

     (a) The Company hereby agrees to employ you as Senior Vice President -
Merchandising and you hereby agree to serve the Company in such capacity during
the "Employment Period" (as defined below).  As Senior Vice President -
     -----------------
Merchandising, you will have merchandising responsibility for both men's and
women's lines in retail.  In the event that the Company decides, in its sole
discretion, to reorganize around gender, you will have merchandising
responsibility in all channels for either men's or women's lines, as determined
by the Company.  You will report either to the Chief Executive Officer of the
Company or to a person immediately reporting to the Chief Executive Officer (a

"span breaker"), as determined by the Company, provided that you shall have the
-------------
right to veto any individual candidate proposed by the Company to serve as a
span breaker between the Chief Executive Officer and you by notifying the
Company of your objection within five (5) days after the date you are notified
of the candidate.

     (b) During the Employment Period, you shall devote your full business time
and energy, attention, skills and ability to the performance of your duties and
responsibilities as provided hereunder on an exclusive basis and shall
faithfully and diligently endeavor to promote the business and best interests of
the Company.  Accordingly, you may not, directly or indirectly, without the
prior written consent of the Company, operate, participate in the management,
operations or control of, or act as an employee, officer, consultant, agent or
representative of, any type of business or service (other than as an employee of
the Company), provided that it shall not be a violation of the foregoing for you
to (i) act or serve as a director, trustee or committee member of any civic or
charitable organization, and (ii) manage your personal, financial and legal
affairs, so long as such activities (described in clauses (i) or (ii)) do not
interfere with the performance of your duties and responsibilities to the
Company as provided hereunder.

2.  Employment Period.

     (a) The "Employment Period" shall commence as of April 30, 1999 (the
              -----------------
"Effective Date") and shall terminate ("Date of Termination") upon the earliest
---------------                         -------------------
to occur of (i) the fifth anniversary of the Effective Date, (ii) your death or
Disability (as defined below), (iii) voluntary
<PAGE>

termination of employment by you, (iv) termination of employment by the Company
without Cause (as defined below) or (v) termination of employment by the Company
for Cause.

     (b) Upon termination of the Employment Period for any reason, you shall be
entitled to any earned but unpaid Base Salary (as defined in Section 3(a) below)
as of the Date of Termination. If the Company terminates the Employment Period
without Cause, you will be entitled to continuation of your Base Salary as in
effect immediately prior to such termination for a period of twelve (12) months
after the date of such termination (the "Salary Continuation Payments"),
                                         ----------------------------
provided that the Salary Continuation Payments are subject to and conditioned
upon your execution of a valid general release and waiver (reasonably acceptable
to the Company), waiving all claims that you may have against the Company, its
successors, assigns, affiliates, employees, officers and directors and your
compliance with the Restrictive Covenants provided in Section 4 hereof.  The
Company shall have no additional obligations under this Agreement.

     (c) For purposes of this Agreement, the term "Cause" shall mean (i) the
                                                   -----
commission of a felony, (ii) willful misconduct or gross negligence in
connection with the performance of your duties as an employee of the Company,
(iii) a material breach of this Agreement, including without limitation your
failure to perform your duties and responsibilities hereunder, (iv) a fraudulent
act or omission by you adverse to the reputation of the Company or any
affiliate, and (v) the disclosure by you of any Confidential Information (as
defined in Section 4(b) hereof) to persons not authorized to know same.  If
subsequent to the termination of your employment, it is discovered that your
employment could have been terminated for Cause, your employment shall, at the
election of the Company, in its sole discretion, be deemed to have been
terminated for Cause.  In addition, for purposes of this Agreement, the term

"Disability" shall mean your incapacity due to physical or mental illness or
-----------
injury, which results in you being unable to perform your duties hereunder for a
period of ninety (90) consecutive working days, and within thirty (30) days
after the Company notifies you that your employment is being terminated for
Disability, you shall not have returned to the performance of your duties on a
full-time basis.

3.  Compensation and Benefits.

     (a) During the Employment Period, your annual base salary shall be $400,000
("Base Salary") and shall be paid pursuant to regular Company payroll practices
  -----------
for the senior executives of the Company.  The Base Salary will be reviewed
annually by the Company.

     (b) In addition to the Base Salary, in each fiscal year during the
Employment Period, you will have the opportunity to earn an annual bonus

("Annual Bonus") at the following percentages of your Base Salary if the Company
--------------
achieves certain performance objectives (which will be determined by the Company
for each such fiscal year in accordance with the Company's bonus plan):
Threshold - 25%, Target - 60% and Stretch - 120% of Base Salary.  Any Annual
Bonus (including the Guaranteed Bonus described below) will be paid only if you
are actively employed with the Company and not in breach of this Agreement on
the date of payment (as described below).  Notwithstanding the foregoing, with
respect to the fiscal year beginning January 31, 1999, your Annual Bonus will be
at least $240,000 (the "Guaranteed Bonus") regardless of whether the performance
                        ----------------
objectives for such fiscal year are achieved.  The Annual Bonus will be paid no
later than May 1 following the fiscal year for which it relates.

                                       2
<PAGE>

     (c) The Company has paid you $180,000 (the "First-Half Special Bonus") as
                                                 ------------------------
consideration for entering into this Agreement.  In addition, on or before
August 31, 1999,  the Company will pay you an additional $180,000 (the "Second-
                                                                        ------
Half Special Bonus" and, together with the First-Half Special Bonus, the
------------------
"Special Bonus"), provided that you are actively employed with the Company and
--------------
not in breach of this Agreement on such date.  You will be required to
immediately pay back a "pro-rata portion" as determined below of the Special
Bonus in the event you voluntarily terminate your employment hereunder prior to
August 31, 2000, and to the extent that you fail to pay back any portion of the
Special Bonus as provided herein, the Company shall have the right to offset any
other payments provided hereunder or otherwise owed to you in respect of such
amount.  The "pro-rata portion" shall equal the product of (I) the sum of the
First-Half Special Bonus and the Second-Half Special Bonus (if paid), and (ii) a
fraction, the numerator of which is the number of full months from and including
the month in which the employment hereunder terminates through August 31, 2000,
and the denominator of which is sixteen.

     (d) As soon as practicable after the Effective Date and subject to approval
of the Compensation Committee of the Board of Directors of J. Crew Group, Inc.,
the Company will cause J. Crew Group, Inc. to grant you an option (the "Option")
                                                                        ------
to purchase twelve thousand (12,000) shares of common stock of J. Crew Group,
Inc. (the "Common Stock") at an exercise price equal to $6.82 per share.  Except
           ------------
as otherwise provided herein, the Option shall be governed by the terms and
subject to the conditions of the 1997 J. Crew Group, Inc. Stock Option Plan (the
"Option Plan"), including the requirements regarding the execution of a Stock
 -----------
Option Grant Agreement and a Stockholders' Agreement.  Twenty percent (20%) of
the Option will become vested and exercisable on each of April 30, 2000 through
2004, provided you are actively employed with the Company on such date.  Subject
to the provisions of the Option Plan, with respect to the Option or any portion
thereof which has not become exercisable, the Option shall expire on the date
your employment with the Company is terminated for any reason, and with respect
to any Option or any portion thereof which has become exercisable, the Option
shall expire on the earlier of: (i) 90 days after your termination of employment
with the Company other than for Cause, death or Disability; (ii) one year after
termination of your employment with the Company by reason of death or
Disability; (iii) the commencement of business on the date your employment with
the Company is, or is deemed to have been, terminated for Cause; or (iv) the
tenth anniversary of the Effective Date.

     (e) In addition to the Option granted hereunder, you currently hold options
to purchase 25,000 shares of Common Stock, which were issued at an exercise
price of $6.82 per share.  If you are employed by the Company on April 30, 2003
and not in breach of this Agreement, the Company will pay you an amount in cash
equal to the Cash Payment, if any, determined in the manner described in Exhibit
A hereto, not later than May 30, 2003.  In general, the calculation described in
Exhibit A is intended to reflect our agreement that, as of April 30, 2003, the
spread, with respect to options to purchase 34,600 shares of Common Stock,
between the value of such shares and the exercise price of the options should be
at least $32.50 per share, subject to adjustment to take into account sales or
other dispositions of the shares by you prior to April 30, 2003.  Any such Cash
Payment shall be in full satisfaction of the foregoing agreement.

                                       3
<PAGE>

     (f) Given that the Cash Payment relates to the 34,600 shares of Common
Stock (the "Option Shares") that you may acquire pursuant to the options
            -------------
described in Subparagraphs (d) and (e) above, if you actually acquired the
Option Shares and then the Company exercised its call rights (the "Call") under
                                                                   ----
the Stockholders' Agreement (as provided under the Option Plan) with respect to
the Option Shares, it is possible that the Company would be required to pay
twice for a portion of such Option Shares.  Accordingly, if a Cash Payment is
made and the Fair Market Value per share of Common Stock on the date the Call is
exercised is equal to or greater than the Fair Market Value per share as of
April 30, 2003, notwithstanding anything herein or in Section 3 of such
Stockholders' Agreement to the contrary, you hereby agree that the amount the
Company shall pay per Option Share pursuant to the Call (the "Call Price") shall
                                                              ----------
equal the amount determined in accordance with Exhibit B hereto.

     (g) During the Employment Period, you will be entitled to participate
generally in the Company's benefit plans, except where specifically provided
herein and except for any severance or other termination of employment plans.
Currently, the Company's benefit package includes 3 weeks vacation, 3 personal
days, holidays, life insurance, medical insurance, long term disability, 401(k)
tax deferred savings plan, a health flexible spending account, and the employee
discount.  The Company reserves the right to change these benefits at any time
in its sole discretion.

     (h) The Company will reimburse you for all reasonable business expenses
upon the presentation of statements of such expenses in accordance with the
Company's policies and procedures now in force or as such policies and
procedures may be modified with respect to the senior executives of the Company.

4.  Restrictive Covenants.

     (a) As additional consideration for the Company entering into this
Agreement, you agree that for a period of twelve (12) months after the date on
which the Employment Period is terminated for any reason, you shall not,
directly or indirectly, (i) engage (either as owner, investor, partner,
employer, employee, consultant or director) in or otherwise perform services for
any Competitive Business (as defined below) which operates within a 100 mile
radius of the location of any store of the Company or its affiliates or in the
same area as the Company directs its mail order operations or any other area in
which the Company or any of its subsidiaries conducts business or in which the
Company or any of its subsidiaries' customers are located as of the Date of
Termination, provided that the foregoing restriction shall not prohibit you from
owning a passive investment of not more than 5% of the total outstanding
securities of any publicly-traded company and (ii) solicit, hire, or seek to
influence the employment decisions of, any employee of the Company on behalf of
any person or entity other than the Company.  The term "Competitive Business"
                                                        --------------------
means the retail, mail order and internet apparel and accessories business and
any other business the Employer or its affiliates are engaged in on the Date of
Termination.

     (b) You agree that, during the Employment Period and thereafter, you will
hold in strict confidence any proprietary or Confidential Information related to
the Company or its

                                       4
<PAGE>

affiliates. For purposes of this Agreement, the term "Confidential Information"
shall mean all information of the Company and its affiliates in whatever form
which is not generally known to the public, including without limitation,
customer lists, trade practices, marketing techniques, fit specifications,
design, pricing structures and practices, research, trade secrets, processes,
systems, programs, methods, software, merchandising, planning, inventory and
financial control, store design and staffing.

     (c) You also agree that breach of the confidentiality, non-competition or
employee non-solicitation provisions provided in paragraphs (a) or (b) of this
Section 4 would cause the Company to suffer irreparable harm for which money
damages would not be an adequate remedy and therefore, if you breach any of the
Restrictive Covenants provided in this Section 4, the Company will be entitled
to an injunction restraining you from violating such restrictive covenant
without the posting of any bond.  If the Company shall institute any action or
proceeding to enforce any such restrictive covenant, you hereby waive the claim
or defense that the Company has an adequate remedy at law and you agree not to
assert in any such action or proceeding the claim or defense that the Company
has an adequate remedy at law.  The foregoing shall not prejudice the Company's
right to require you to account for and pay over to the Company, and you hereby
agree to account for and pay over, the compensation, profits, monies, accruals
and other benefits derived or received by you as a result of any transaction
constituting a breach of any of the Restrictive Covenants provided in this
Section 4.

     (d) You agree that during the Employment Period and thereafter you shall
not disclose any information regarding the existence or substance of this
Agreement to any third party (including employees of the Company) without the
prior written consent of the Chairman of the Company except as may be required
by law, during any legal proceeding brought by you relating to this Agreement or
with your professional advisers for purposes of discussing the subject matter
hereof and, with respect to such professional advisers, you agree to inform them
of your obligations hereunder and take all reasonable steps to ensure that such
professional advisers do not disclose the existence or substance hereof.
Further, you agree not to directly or indirectly disparage or defame the
Company, its affiliates or any of their directors, officers or employees.

5.  Miscellaneous.

     (a) Any notice or other communication required or permitted under this
Agreement shall be effective only if it is in writing and shall be deemed to be
given when delivered personally or four days after it is mailed by registered or
certified mail, postage prepaid, return receipt requested or one day after it is
sent by a reputable overnight courier service and, in each case, addressed as
follows:

   If to the Company:

     J. Crew Operating Corp.
     770 Broadway
     Twelfth Floor

                                       5
<PAGE>

     New York, NY 10003
     Attention:  General Counsel

   If to you:

     Ms. Carol Sharpe
     6 Eno Lane
     Westport, CT 06880

or to such other address as any party hereto may designate by notice to the
other, and shall be deemed to have been given upon receipt.

     (b) This Agreement constitutes the entire agreement between you and the
Company with respect to your employment by the Company, and supersedes and is in
full substitution for any and all prior understandings or agreements with
respect to your employment, including without limitation the March 23, 1999
letter agreement/term sheet.

     (c) This Agreement shall inure to the benefit of and be an obligation of
the Company's assigns and successors; however you may not assign your duties and
obligations hereunder to any other party.

     (d) No provision of this Agreement may be amended or waived, unless such
amendment or waiver is specifically agreed to in writing and signed by you and
an officer of the Company duly authorized to execute such amendment. The failure
by either you or the Company at any time to require the performance by the other
of any provision hereof shall in no way affect the full right to require such
performance at any time thereafter, nor shall the waiver by you or the Company
of a breach of any provision hereof be taken or held to be a waiver of any
succeeding breach of such provision or a waiver of the provision itself or a
waiver of any other provision of this Agreement.

     (e) You and the Company acknowledge and agree that each of you has reviewed
and negotiated the terms and provisions of this Agreement and has had the
opportunity to contribute to its revision.  Accordingly, the rule of
construction to the effect that ambiguities are resolved against the drafting
party shall not be employed in the interpretation of this Agreement.  Rather,
the terms of this Agreement shall be construed fairly as to both parties and not
in favor or against either party.

     (f) Any provision of this Agreement (or portion thereof) which is deemed
invalid, illegal or unenforceable in any jurisdiction shall, as to that
jurisdiction and subject to this Section, be ineffective to the extent of such
invalidity, illegality or unenforceability, without affecting in any way the
remaining provisions thereof in such jurisdiction or rendering that or any other
provisions of this Agreement invalid, illegal, or unenforceable in any other
jurisdiction.  If any covenant should be deemed invalid, illegal or
unenforceable because its scope is considered excessive, such covenant shall be
modified so that the scope of the covenant is reduced only to the minimum extent
necessary to render the modified covenant valid, legal and

                                       6
<PAGE>

enforceable. No waiver of any provision or violation of this Agreement by the
Company shall be implied by the Company's forbearance or failure to take action.

     (g) The Company may withhold from any amounts payable to you hereunder all
federal, state, city or other taxes that the Company may reasonably determine
are required to be withheld pursuant to any applicable law or regulation, (it
being understood, that you shall be responsible for payment of all taxes in
respect of the payments and benefits provided herein).

     (h)  This Agreement may be executed in several counterparts, each of which
shall be deemed an original, but all of which shall constitute one and the same
instrument.

     (i)  The headings in this Agreement are inserted for convenience of
reference only and shall not be a part of or control or affect the meaning of
any provision hereof.

     (j) This Agreement and all amendments thereof shall, in all respects, be
governed by and construed and enforced in accordance with the internal laws
(without regard to principles of conflicts of law) of the State of NEW YORK.
Each party hereto hereby agrees to and accepts the exclusive jurisdiction of any
court in New York County or the U.S. District Court for the Southern District of
New York in respect of any action or proceeding relating to the subject matter
hereof, expressly waiving any defense relating to jurisdiction or forum non
                                                                  ---------
conveniens, and consents to service of process by U.S. certified or registered
----------
mail in any action or proceeding with respect to this Agreement.

          If the terms of this letter Agreement meet with your approval, please
sign and return one copy to me.

                                 Sincerely,

                                 _____________________
                                 Emily Woods

                                 Chairman

Agreed to and Accepted:

_____________________________
Carol Sharpe

Date: ________________

                                       7
<PAGE>

EXHIBIT A
---------

                     GUARANTEED OPTION CASH PAYMENT FORMULA
                     --------------------------------------

                              The Cash Payment, if any, provided in Section 3(e)
hereof, shall be calculated as follows:

                          CP = (X - SA)  -  (FMV x N)

Where:

CP = the Cash Payment, if any, provided under Section 3(e) hereof;

X = $1,360,472;

SA = the greater of (i) any proceeds received upon the actual or constructive
sale or other disposition of any shares of Common Stock of the Company ("Sales
                                                                         -----
Transactions") and (ii) $39.32 multiplied by the number of shares sold or
------------
disposed of in the Sales Transaction;

FMV = the greater of (i) $6.82 and (ii) the Fair Market Value per share of
Common Stock as of April 30, 2003, as determined pursuant to the Option Plan;

N = 34,600 less the number of shares of Common Stock sold in all Sales
Transactions.

In the event of an adjustment in the Options pursuant to Section 4.13 of the
Option Plan, the foregoing amounts shall be equitably adjusted in a similar
manner in order to avoid the dilution or enlargement of rights or payments
hereunder.

                                       8
<PAGE>

EXHIBIT B
---------

                               Call Price Formula
                               ------------------

          If the Fair Market Value per share of Common Stock (as determined
under the Option Plan) on the date the Call is exercised is equal to or greater
than the Fair Market Value per share on April 30, 2003, then the Call Price per
share in respect of the Option Shares shall equal:

                      (the greater of Y or FMV1) - (CP/N)

where,

FMV1 = Fair Market Value per share on April 30, 2003;

Y = $39.32;

CP = The Cash Payment as determined under Exhibit A of this Letter Agreement;
and

N  = The number of shares as determined under Exhibit A of this Letter
Agreement.

                                       9

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