J. Crew Posts Net Loss; Reaches Agreement on Madewell IPO

Fast-growing Madewell is poised for an IPO.

By David Moin on December 2, 2019

J. Crew Group is proceeding with its plan to spin off its fast-growing Madewell brand into a separate public company, but continues to lose money.

The Madewell initial public offering plan is geared to reduce a substantial portion of the group’s $1.7 billion in debt, realize the true value of the popular Madewell brand, and shore up J. Crew so it can rebound.

The company said Monday that it reached an agreement with its ad hoc group of creditors on separating J. Crew and Madewell into two separate companies, launching the Madewell IPO, and recapitalizing the balance sheet. The IPO was conditional on reaching the agreement with the lenders.

However, there is no guarantee the IPO will happen. The company has until March 18 to take Madewell public. If it doesn’t meet the deadline, the transaction support agreement will be terminated, according to a filing with the Securities and Exchange Commission.

On Monday, J. Crew Group reported that its net loss for the third quarter grew to $19.9 million, compared to $5.7 million in the third quarter last year. The loss this year partly stemmed from the transaction costs and non-cash impairment charges. The third quarter last year reflects the impact of the benefit related to a lease termination payment associated with relocating the group’s headquarters from Greenwich Village to lower Manhattan inside Brookfield Place.

Total revenues in the quarter increased 1 percent to $625.6 million. Comparable company sales increased 3 percent.

By division, J. Crew sales decreased 4 percent to $415.8 million; comparable sales were flat. Revenues reflect net closure of 41 stores in the last 12 months.

Madewell sales increased 13 percent to $151.6 million; comparable sales increased 10 percent.

Gross margin increased to 40.7 percent from 38.3 percent in the year ago quarter.

Operating income was $11.5 million compared to $32.7 million in the third quarter last year.

Adjusted earnings before interest, taxes, depreciation and amortization increased $25.2 million, or 47 percent, to $78.8 million from $53.6 million in the third quarter last year.

The TSA also involves the formation of a special purpose vehicle limited liability company, called Chinos SPV which, following the transactions, will be the ultimate parent company and hold any common stock of Madewell not sold to the public in the potential IPO.

To improve its balance sheet, the company expects to exchange a portion of its outstanding term loans for new A-1 senior secured notes issued by Chinos SPV and undertake additional transactions pursuant to the TSA.

Michael J. Nicholson, president, chief operating officer and interim chief executive officer, commented that as a result of the TSA, “we expect both J. Crew and Madewell to have sustainable capital structures and to deliver enhanced value for our stakeholders.”

Earlier this year, a document released to lenders indicated that the company valued Madewell, which generated more than $600 million in revenues last year, at close to $3 billion, which financial sources said was too high.

The document also indicated that Madewell sought to generate $970 million in proceeds from the IPO, representing 40 percent of its equity. That valued Madewell at $2.45 billion in equity, or 20 times its EBITDA of $113 million last year.

The company proposed issuing $500 million in new secured debt, bringing Madewell’s total enterprise value to $2.925 billion.

J. Crew Group has a $1.372 billion term loan due in 2021 and a $364 million asset-based loan.

Addressing the company’s most recent performance, Nicholson said, “Our third-quarter results reflect adjusted EBITDA growth of nearly 50 percent, marking our strongest third-quarter performance in the last five years. These results reflect encouraging momentum at the J. Crew brand fueled by strong gross margin performance, continued growth at Madewell and the early benefits of our multiyear cost optimization program announced in September. Our teams are enthusiastic about our progress and remain relentlessly focused on continuing to capitalize on this momentum as we head into the holiday season.”

During a conference call, Nicholson said the Factory division’s recovery strategy is gaining traction, and that margin Improvements seen at J. Crew and Factory were partially offset by a decrease in margins at Madewell.

“Our overall strategy remains focused on three key priorities, to capitalize on J. Crew’s momentum and focus on returning to profitable growth. Next, fueling Madewell’s success to achieve its full potential and driving gross margin improvement.…In the third quarter we made progress toward these goals.”

Nicholson, while citing the “challenging store traffic and promotional environment” throughout retailing, did say that more than half of the company’s sales are generated through e-commerce.

J. Crew has been struggling for a few years, but Nicholson suggested there was some light at the end of the tunnel, with refinements to the assortment and a renewed focus on cashmere, classic knit tops and blazers, which are among J. Crew’s best categories historically. He also said J. Crew’s fashion offerings have been expanded, basics were maximized and inventory turned more efficiently.

The company’s fall marketing campaign, themed on classics with a twist, “harkened back on our heritage,” and was successful, the interim ceo said.

Also last quarter, the company overhauled its mobile experience and revealed a cost optimization program seeking to save $50 million over the next three years.

Nicholson did not comment on how the search for a new permanent ceo was going.

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