One of the most debt-laden retailers in America is getting a second shot. J.Crew laid out a plan for bankruptcy on Monday in which it will eliminate virtually all $1.7 billion of its leveraged buyout debt, freeing the preppy chain up from $150 million in annual interest payments and putting it under the control of its lenders.
The plan will allow the chain of more than 450 stores, which has delivered losses for six consecutive years, to invest more heavily in things like e-commerce, marketing and store upgrades.
“What you have now is a debt-free J.Crew,” says Moody’s analyst Raya Sokolyanska. “That frees up a lot of money to invest in the business.”
J.Crew’s debt woes began in 2011, when it was acquired by private equity firms TPG Capital and Leonard Green & Partners for $3 billion. In the last several years, the company has struggled to win over shoppers in the face of increasing competition from online and fast-fashion brands like H&M and Zara, crushing sales and sending executives packing.
The company had planned to raise cash to pay down its loans by spinning off Madewell, its fast-growing women’s brand, as a separate publicly-traded company late last year. However, the IPO was shelved amid market turmoil. That forced it to look into other options, with the due date on its loans set for early 2021.
This week’s agreement puts the two PE firms in the back seat after nearly a decade of control, as lenders including hedge funds Anchorage Capital Group, GSO Capital Partners and Davidson Kempner Capital Management take over.
“When a lender takes equity, most of the time it is because they don’t have a better option,” says Jeffrey Reisner, a partner at McDermott Will & Emery who specializes in restructuring and bankruptcy. “It also usually means the original investors were unwilling to put in more dollars.”
J.Crew — which has 181 namesake stores, 140 Madewell stores and 170 outlet stores — will likely seek to close stores or renegotiate leases as part of its bankruptcy proceedings. It has secured $400 million in debtor-in-possession financing to fund operations during the restructuring process. In the meantime, it will continue to fulfill online orders and begin the process of reopening stores.
Deleveraging the balance sheet and continuing to invest in e-commerce “will position the company for future success,” said Kevin Ulrich, head of distressed investment firm Anchorage, in a statement.
However, it has its work cut out for it. “The J.Crew brand had become quite tarnished, boring and was not standing out well in the market,” says Neil Saunders, managing director at GlobalData Retail. In 2019, sales for the J.Crew brand fell 4%, which was only partially offset by a 14% rise in sales from Madewell. “The biggest challenge is going to be reinventing themselves in a period of muted demand.”
The retail industry is grappling with the fallout from the coronavirus pandemic, which has resulted in prolonged store closures and a pullback in consumer spending. In March, sales of clothing and accessories fell by more than 50%, according to the Department of Commerce. Those figures are expected to be worse in April, because many stores remained open for part of March. It will also likely require chains to offer promotions that eat into margins in order to move mountains of unsold inventory, much of which is no longer in season.