Moody's downgrades J. Crew over proposed debt exchanges

Dive Brief:

Moody’s Investor Service on Friday downgraded J. Crew parent Chinos Intermediate Holdings to Caa3-PD from Caa2-PD in light of the company’s proposed debt exchanges.
Last week, J. Crew announced it offered holders of its holding company notes (with outstanding amount of $543 million) to exchange into new $200 million 9% notes due 2021, as well as 5% common equity in Chinos Holdings Inc. “If either of the proposed debt exchanges is completed, Moody's will consider it a distressed exchange, since they are aimed at alleviating pressure on a capital structure that Moody's views as unsustainable, and also result in a significant economic loss to the holding company note-holders relative to the original instrument,” Moody’s said in a note emailed to Retail Dive.
The apparel retailer managed to eke out a profit in its most recent quarter, even as sales and revenue slid: Fourth quarter total revenues (including the flagship, Madewell and Factory sales) fell 2% to $695 million and same-store sales across the apparel retailer’s brands fell 5%, compared to a 4% decrease in the year-ago quarter. Moody’s acknowledged the retailer’s efforts to contain costs but said that “meaningful earnings recovery would require bringing customers back to generate positive same store sales, which has proved elusive.”

Dive Insight:

J. Crew has struggled mightily in its turnaround, for years now, continually failing to recapture its previous place as a stalwart for the fashionable preppy set. The retailer has seized some control of its expenses and its discounting, but its flagship brand hasn’t been able to gain meaningful attention from shoppers in recent years and its lower-priced Madewell brand, which provides a fraction of its sales, has taken precedence.

The brand's reputation for fit and quality has suffered, and that has led to a sense among apparel shoppers that it’s not a good deal, unless it’s on sale, says GlobalData Retail Managing Director Neil Saunders. “As much as the Madewell brand is healthy, this success is more than offset by ongoing challenges at the much larger J. Crew segment,” he noted in an email to Retail Dive. “While declines in the latter were much less severe this quarter, a 7% dip in comparable sales is still indicative of a brand that is still not fully resonating with consumers. It also underlines the fact that the productivity of J. Crew's stores is waning.”

The financial picture is also increasingly dire for J. Crew, which has tussled with lenders over its efforts to restructure its debt. Six years after TPG Capital LP and Leonard Green & Partners L.P. acquired J. Crew for $2.8 billion and took it private, the retailer looks to be the latest in a string of retailers whose turnaround capital needs bump up against the profit-taking goals of private equity owners. Talk of going public has died down in recent months as J. Crew has continued to falter.

Last month the company filed a lawsuit alleging that an ad hoc group of lenders aims to disrupt its capital restructuring plans. J. Crew is in discussions with creditors to renegotiate its approximately $2 billion debt load, and on Dec. 15, it began to execute a plan to transfer its intellectual property to an unrestricted Cayman Islands subsidiary. The retailer wants the court to declare that its moves are in full compliance under its term loan agreement — but those plans have introduced uncertainty and don't bode well, Moody's said.

"Despite providing J. Crew with runway through 2021 to improve operations, the exchange will still leave the company with unsustainable leverage and uncertainty regarding its ability to stabilize earnings and return to growth,” Moody's analyst Raya Sokolyanska said in a statement emailed to Retail Dive.