New York: J. Crew Group Inc. is heading into 2017 on a mission that gets more critical with each passing day: turn around a two-year sales slump or slam head-on into a wall of debt.
Some of the company’s $2 billion (Dh7.3 billion) in debt becomes current in 2018, and J. Crew needs to revive its flagging business to stave off rising odds of default. To do that, the retailer is focusing on its preppy heritage, expanding its discount business and fuelling the growth of its small but successful Madewell brand geared toward millennials.
For some analysts, it may already be too late.
“I don’t think they know how to fix J. Crew,” said Carla Casella, an analyst at JPMorgan Chase & Co. “They were just living on the past strength of their brand.”
J. Crew has fallen sharply out of favour since first lady Michelle Obama and her daughters wore the brand at the 2013 inauguration, casting a halo over the company with a wave of publicity that money couldn’t buy. That glow lasted into early 2014, when the retailer was interviewing banks as it considered an initial public offering.
An IPO would have enabled CEO Mickey Drexler and private equity backers TPG Capital and Leonard Green & Partners LP to exit their 2011 leveraged buyout. Over the past two years, the retailer has lost customers who complained of high prices on low-quality and ill-fitting clothes, and its same-store sales have fallen in 10 of the past 11 quarters. To move goods, the retailer has offered deep discounts and expanded its off-price factory and Mercantile chains.
Drexler, the former Gap Inc. CEO, is working with creditors to restructure the company’s debt. One of his proposals, a plan to shift the J. Crew brand name to an entity in the Cayman Islands, has riled lenders. They say the change could prevent them from demanding the intellectual property as collateral or lower the value of their holdings in any restructuring.
J. Crew, which began as a popular catalogue company and expanded into brick-and-mortar stores in the 1990s, has fallen a long way from its peak. The company cultivated its image of an aspirational lifestyle brand by opening a two-level wedding salon on New York’s Madison Avenue in 2010, and almost doubled its store base from 2009 to 2016.
Now, much of that image is unravelling. The company said this year it will shutter its 12-year-old bridal business, and it’s entered into an agreement to wholesale the iconic J. Crew brand through Nordstrom — the first time the company’s signature apparel will be sold outside its carefully curated stores.
One bright spot is the 110-store Madewell chain, J. Crew’s modern twist on basics. Drexler bought the Madewell name in 2003 for $125,000, and it was absorbed by J. Crew in 2005.
The bet may be paying off. Madewell’s same-store sales — a closely watched measure — rose 4.1 per cent in the third quarter from a year earlier. Sales by that measure fell 9.2 per cent at the J. Crew brand.
Still, Madewell, which opened its first store in 2006, represents only about 12 per cent of J. Crew’s annual revenue. It generated $88 million in sales last quarter, compared with $488 million brought in by the flagship brand.
“It’s the crown jewel,” said Casella at JPMorgan. “It’s small, so it still has a lot of growth from that perspective. Not everyone knows it, but it’s more trend-right and price-right.”
The partnership with Nordstrom, meanwhile, could let the company close some costly J. Crew locations or convert them into the brand’s growing value-focused chains, said Noel Hebert, a Bloomberg Intelligence analyst.
At its main brand, the company is returning to its roots. Last year, Drexler said J. Crew would focus on its classic, basic styles and produce less of the flashy, high-style items it had recently introduced.
“They’re trying to return to the core of what the business is,” Hebert said. “The question that I can’t answer — and I don’t know if anyone can — is what’s the appeal of that core J. Crew business, and how big does that get to be?”
