Moody's boosts J. Crew on cost cuts and Madewell growth

Dive Brief:

J.Crew's turnaround is gaining some traction as Moody's Investors Service on Tuesday raised its outlook for the struggling retailer to "positive" from "stable," according to a report emailed to Retail Dive.
The boost "reflects J. Crew's earnings improvement and deleveraging over the past several quarters, and Moody's expectations that the company's initiatives to improve same-store sales may lead to revenue stabilization and growth as well as further [earnings before interest, taxes, depreciation and amortization] momentum in the next 12-18 months," according to the report.
Moody's Vice President and Lead Analyst Raya Sokolyanska called out growth at the company's tiny, yet better performing Madewell brand but said that ongoing stability will depend "on J. Crew's ability to stabilize and grow the namesake brand."

Dive Insight:

J. Crew's overall fortunes stabilized in the fourth quarter after a tumultuous year. The apparel retailer has been hobbled by debt, which has hamstrung turnaround efforts and forced a debt swap drama last summer.

At the end of the fourth quarter, total debt was $1.71 billion, up from $1.51 billion at the same point last year. Transaction costs ($36.6 million) and debt repayments ($27 million) drained coffers — cash and cash equivalents were $107.1 million compared to $132.2 million at the year-ago point, the company said.

Its comeback story is centered on Madewell, a denim-focused brand that was the brainchild of former CEO Mickey Drexler, who also devised Gap Inc.'s Old Navy (now the centerpiece of that company's growth strategy). Madewell is seeing record sales growth in stores and online.

"The brand's compelling product offering continues to resonate with customers, delivering strong full price selling led by our denim business," COO Mike Nicholson said on a conference call in March, adding that the company plans to "hyper-scale Madewell's growth."

That maneuver is clear in J. Crew's morphing footprint. Last year, it opened eight Maxwell stores, one J. Crew location and one J. Crew factory store even as it shuttered 51 units. This year, plans are to open 10 Madewell stores, one J. Crew and close about 20. The brand is also encroaching on J.Crew's territory, with plans to open Madewell shop-in-shops inside six J.Crew locations in New York City, Florida, Iowa, New Hampshire and Connecticut.

That's all well and good, but the flagship has to catch up, and its ratings could be downgraded if revenues and earnings decline, or if liquidity weakens, Moody's warned.

"J. Crew has reduced its leverage by about 2.5 times since the July 2017 debt exchange, as a result of cost savings and growth at the Madewell brand," Sokolyanska said in her note. "However, the sustainability of earnings momentum going forward depends on J. Crew's ability to stabilize and grow the namesake brand. Comparable sales declines are decelerating, driven by a number of initiatives that could lead to a return to revenue growth — such as adding sub-brands and product categories, improving omnichannel capabilities, shortening the product cycle, and growing wholesale partnerships including Nordstrom in North America."