Struggling J. Crew reportedly mulls spinoff of successful Madewell brand

Dive Brief:

Struggling retailer J. Crew is reportedly contemplating a carve-out of its lower-priced Madewell brand, which has outpaced the flagship brand in recent quarters, sources have told Reuters.
J. Crew is working with investment bank Lazard Ltd in the effort, which could culminate in a sale, according to the report.
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.

Dive Insight:

J. Crew created its Madewell brand in a model similar to Gap’s Old Navy, which was the brainchild of J. Crew’s CEO Mickey 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 that 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 reports that there’s a provision, meant to protect lenders' interest, that precludes J. Crew from selling Madewell depending on its debt situation.

The retailer recently 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, according to Reuters.

J. Crew has disappointed many of its most ardent, longterm loyalists as it has cut back on quality of make and fit. The company recently gave up on its bridal business, which had appealed to younger brides looking for simpler, less costly wedding and bridesmaid dresses. The brand is also looking to make a late push into athleisure.

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.”

Lazard and TPG declined comment and Leonard Green and J. Crew did not return requests for comment to Reuters.