S&P Global Ratings analysts last week assigned their B- issuer rating on more than $2 billion in reported debt after J. Crew's parent company emerged from bankruptcy, citing "expectations for continued operating performance uncertainty and a significantly lightened debt load."
The analysts also gave a B- issue-level rating on the company's $400 million exit term loan maturing in 2027 and a recovery rating on that debt of 3, "indicating our expectation for rounded estimated recovery of 65% (recovery range of 50%-70%)," according to an emailed press release.
The company's outlook is negative, reflecting expectations that its "operating performance will remain weak in the next 12 to 18 months amid economic uncertainty, industry headwinds, and company-specific operational challenges despite its improved capital structure," S&P said.
Through its recent bankruptcy process, the J. Crew and Madewell parent company, now named "Chinos Intermediate 2," has significantly trimmed the massive debt load that had undermined the namesake brand's ability to right itself and the healthier but smaller brand's capacity to grow.
J. Crew provided about 70% of the company's sales last year, with Madewell, which enjoyed double-digit comps from 2018 to 2019, chipping in more than 20%, thanks to what S&P analysts said is "merchandise that resonates with its millennial customer segmentation," per S&P Global's release.
The firm also noted that Madewell had meaningful store expansion over the same period, although other observers have warned that Madewell could be going too far with that. And S&P Global analysts said they expect a return to growth next year, but that even with the lower debt, "we think that the risk of earnings pressure will continue."
The fragility in the apparel market and uncertainty from the ongoing pandemic will make it difficult for the company to make great strides in any turnaround, according to this analysis from S&P's Mathew Christy, Helena Song and Andy Sookram.
"Chinos' operating performance has been historically volatile, a trend we expect to continue over the next 12 to 18 months," they wrote, citing last year's adjusted EBITDA margin decline of more than 400 basis points to 11.7% in 2019, from 15.9% in 2015. "We attribute this primarily to merchandising missteps, product discounting and promotion, and a loss of customers at J. Crew. In addition, we think these trends have been exaggerated because of the coronavirus pandemic."
The analysts describe the specialty apparel market as "highly fragmented and competitive," with downward trends hitting mid-priced clothing retailers especially hard and the pandemic accelerating them.
"Industry competition has intensified in recent years, with escalating threats from fast fashion and online retail, as well as continued declines in mall traffic," they noted.
The upcoming holidays threaten to inject yet more precariousness into J. Crew's fortunes, largely due to the pandemic. A second wave could reintroduce more temporary store closures which S&P warned could "slow or halt performance recovery."