- J. Crew Group filed for Chapter 11 bankruptcy protection on Monday with $400 million in financing lined up and a pre-negotiated deal with a majority of its lenders that would deleverage its balance sheet. Under the deal, lenders will have nearly $1.7 billion in debt converted into equity in the retailer.
- With about 500 stores in all, J. Crew is seeking the ability to exit its leases through the bankruptcy process, according to court documents. The company's COO said it is working with advisers to "optimize" its footprint. But J. Crew has not said yet how many stores it might close in Chapter 11.
- J. Crew said in the release that Madewill will remain part of the company. A planned IPO for Madewell was delayed earlier this year.
After years of drama, distress and speculation, it was a global pandemic that sent J. Crew into bankruptcy after disrupting the company's plans to steady itself.
Madewell's IPO was key to J. Crew's plans. It would have provided cash to help pay down the retailer's debt load, left there by a private equity buyout early in the twenty-tens. But as COO Michael Nicholson said in court papers, the turmoil in credit markets as COVID-19 spread through the world helped derail the IPO.
Since March, the pandemic has wreaked havoc on the retail world, including J. Crew. The company has temporarily closed all its stores in the U.S. as the country tries to slow the spread of the coronavirus. Nicholson said the company expects a $900 million decline in sales with its stores closed. The COO called the resulting liquidity and operations challenges posed by the pandemic "unprecedented." At the outset of April, J. Crew furloughed 11,000 employees.
"Though many companies across all industries faced hardships and tumultuous market conditions, the Debtors were uniquely and severely impacted as a customer-facing retailer in an already struggling industry," Nicholson said, pointing to the dual challenges of demand and supply disruptions.
J. Crew's financial woes are much older than the new virus. The retailer has appeared on every bankruptcy watch list Retail Dive has published since it launched them in summer 2017. The company has taken steps to buy itself time through (contested) debt deals, but has never sustained enough sales and profit growth to take significant leverage off its books.
Along with financial travails, the company has also gone through management turmoil. Longtime CEO Mickey Drexler stepped down in June 2017, not long after the departure of Jenna Lyons as president of the J. Crew brand. Drexler was replaced by James Brett, the previous head of West Elm, who left J. Crew after just over a year. In January, the company named former Victoria's Secret exec Jan Singer as its new CEO.
Without cash from a Madewell IPO, the new plan will keep the fast-growing brand in the fold and turn over ownership to J. Crew's lenders. Going into bankruptcy with a pre-negotiated plan with lenders bodes well for J. Crew. It's the companies that go in without a plan or a buyer lined up that face the most risk of never leaving bankruptcy. The big question is what the world and market will look like when or if J. Crew does exit.
"Before Chapter 11, J Crew was on a slow march to ruin. This process gives the company a chance to survive," Neil Saunders, managing director of GlobalData Retail, said in emailed comments. "However, that survival is not just dependent on reduced debt; it requires a reinvention of the J Crew brand. Given the apparel market will be highly subdued, extremely promotional, and intensely competitive as the coronavirus crisis abates, reinvigoration of the ailing label will be an order of the tallest magnitude."