J. Crew reportedly in talks to restructure $2B debt

Dive Brief:

J. Crew Group is in discussions with its creditors to renegotiate its approximately $2 billion debt load, sources told Reuters.
The struggling apparel retailer is also in the midst of a plan to transfer its intellectual property to an unrestricted Cayman Islands subsidiary, four sources told Debtwire, though the lower-priced Madewell brand isn’t part of that plan, two of those sources said.
Last month, J. Crew reportedly was mulling a spinoff of the Madewell brand, sources told Reuters.

Dive Insight:

Talk of J. Crew's possible debt restructure has been circulating since October, when chairman and CEO Mickey Drexler reportedly began huddling with consultants at McKinsey & Co. on a strategy to turn the struggling apparel retailer around. The cash-strapped company has disappointed many of its most ardent, long-term loyalists as it has cut back on quality of make and fit, and it recently gave up on its bridal business, which had appealed to younger brides looking for simpler, less costly wedding and bridesmaid dresses. The brand also looked to make a late push into athleisure.

J. Crew in September reported a second quarter total revenue decline of 4% down to $569.8 million amid what Drexler called a "challenging traffic environment.” Its Q2 net loss narrowed to $8.6 million, compared to $13.6 million in the year-ago period. Overall Q2 same-store sales decreased 8% compared to a decrease of 11% in the second quarter last year. J. Crew, with Madewell, had some $2 billion in debt as of July 30 and $49.2 million in cash.

In a September report emailed to Retail Dive, Moody’s analysts said J.Crew's continued sales declines in the second quarter were a credit negative for the retailer, which needed to “show some sales traction over the very near term to sustain its capital structure and show that it can materially grow EBITDA, reduce leverage and address refinancing needs.”

The retailer's Madewell brand was created in a model similar to Gap’s Old Navy, which was the brainchild of Drexler when he was CEO at Gap. Just as Old Navy has become Gap’s saving grace, Madewell is now similarly boosting J.Crew’s overall results.

That suggests the lower-priced, lower-quality siblings may have cannibalized the flagship units. While spinning off or selling Madewell could help its private equity owners monetize its value, it’s a dicey proposition that could leave J. Crew and its lenders vulnerable. Indeed, Reuters reported last month that there’s a provision, meant to protect lenders' interest, that precludes J. Crew from selling Madewell depending on its debt situation.

TPG Capital LP and Leonard Green & Partners L.P. acquired J. Crew for $2.8 billion in 2011 and took the company private. Talks of going public have died down in recent months as the company has continued to falter.