Dive Brief:

• The credit unit of private equity firm Blackstone Group, GSO Capital Partners, is acquiring a bigger slice of J. Crew's debt, unnamed sources told Reuters. The move could buy J. Crew more time as it tries to trim expenses and turn around and help it avoid bankruptcy, according to the report.

• In March, Moody’s Investors Service downgraded J. Crew parent Chinos Intermediate Holdings to Caa3-PD from Caa2-PD in light of the company’s proposed debt exchanges. The company has been struggling in particular with $567 million in unsecured bonds due in 2019, held at the Chinos parent company level.

• In December, the company began to execute a plan to transfer its intellectual property to an unrestricted Cayman Islands subsidiary in order to expand its options regarding its debt. J. Crew took lenders that objected (on the grounds that the action constituted default), asking the court to declare that its moves are in full compliance under its term loan agreement.

Dive Insight:

Talk of J. Crew's 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 gave up on its bridal business last year and attempted to make a late push into the athleisure space, but its financial picture has only grown more dire as it has failed to recapture the ardor of even many of its most loyal fans. Many shoppers have drifted as its apparel has declined in fit and quality while its prices have remained outsized in an era when fast-fashion retailers have provided pleasing styles at drastically low prices. 

There are a few indications of improvement for J. Crew, Philip Emma, a Debtwire analyst told Retail Dive. Its fourth quarter report reflected consistent revenue challenges, with same-store sales at the J. Crew brand down 7%, although the company boosted its gross profit margin, he noted. “When combining that improvement with the benefits of cost cutting, J. Crew  adjusted EBITDA increase 17% to $52m in 4Q16,” Emma told Retail Dive in an email. “More importantly, the year over year change in inventory reflected a 15% decrease — which may better position the company to maintain margins going forward."

The ongoing debt issue complicates the company’s turnaround strategy, Emma also said. “Where things stand is that J. Crew’s operations are improving, but they have a long way to go to get back to where they were a few years ago,” he said. “They are in the midst of litigation with their banks about the transfer of the trademarks, and they are exchanging possible debt terms with holders of the Chinos debt. This creates a level of uncertainty both operationally and financially.”

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 have died down in recent months as J. Crew has continued to falter, and those PE firms may now be seeking other ways to make good on their investment. 

Last month the retailer announced 250 job cuts, mostly from its corporate headquarters in New York, including 150 full-time and 100 open positions, and more shifts in its executive ranks. Earlier last month, the company announced that president and executive creative director Jenna Lyons, credited as a style guru who worked closely with CEO Mickey Drexler, would leave when her contract ends in December. Lyons's departure signals a shift from her idiosyncratic style.

“J. Crew needs to develop a much clearer brand handwriting and needs to infuse its assortments with pieces that have subtle embellishments,” Neil Saunders , GlobalData Retail managing director, told Retail Dive in an email last month. “This is the thinking that brands like Ted Baker use to stay relevant and to justify the premiums that they charge. At present we believe J. Crew is a very long way from this.”