Dive Brief:

• S&P Global downgraded J. Jill's borrowing entity after the apparel retailer reported a weak third quarter and lowered guidance earlier this month.
• Analysts with the ratings agency lowered Jill Acquisition's credit rating from B- to CCC+, indicating a substantial risk of default, "based on our view that the company's capital structure is potentially unsustainable," S&P said in an emailed press release Thursday.
• S&P has a negative outlook for the retailer, meaning they anticipate further downgrades in the future given major debt maturities in 2022 and because J. Jill's "volatile performance threatens its ability to meet covenant requirements."

Dive Insight:

In dual announcements last week, J. Jill disclosed that its CEO, Linda Heasley, had stepped down and that its Q3 comparable sales fell 7% while top-line sales were down 4.6% year over year. 

James Scully, the board member and retail vet who stepped in as interim chief, called the results "disappointing" but said the company "is working hard to stabilize the business and drive improvements at a much quicker pace."

He told analysts on a conference call that J. Jill's retail channel, which accounts for the majority of the company's sales (with direct-to-consumer making up the rest) "is one to be admired" but that its "performance has slowed," according to a Seeking Alpha transcript.

S&P analysts put the apparel seller's performance squarely on those charged with operating it. "Management missteps this year have included less effective marketing strategies and repeated merchandise mistakes with less on-trend colors and styles," the analysts said. "In addition to hurting sales and profitability, this has caused a weakening brand relevance."

They added: "As such, we believe Jill's once-loyal followers have started to stray toward other brands. In our view, winning back these customers will become increasingly challenging if merchandise missteps extend and customers develop preferences to competing retailers." 

There's likely more pain ahead for J. Jill as apparel goes through a raucous season of discounting and competition. Executives expect comps to decline up to 10% in Q4 and 6% for the year. S&P analysts expect the company's EBITDA to shrink by 45%.

J. Jill promotions could also extend as it tries to clear inventory and revamp its assortment. But that is a short-term worry. The longer-term problem for J. Jill is holding onto its customers in a sagging apparel market that is full of discount wars, and where few players — TJX Cos., Ross and Target among them — are consistently growing their sales and market share.

Asked by an analyst last week if J. Jill had alienated its core customers in recent years, CFO and executive vice president Mark Webb said that customer accounts were positive to date but noted that "[t]he reality is she is spending less," and that the retailer would need to improve its assortment.