Dive brief:

  • S&P Global Ratings analysts last week assigned their issuer B rating to more than $ 2 billion in debt reported after the exit of J. Crew’s parent company, citing “expectations of continued uncertainty in operating performance and significantly reduced leverage. “

  • The AAnalysts also assigned a B- level rating to the company’s $ 400 million exit term loan maturing in 2027 and a recovery rating on that debt of 3, “indicating our expectation of estimated recovery. rounded by 65% ​​(overlap range from 50% to 70%) “, according to an emailed press release.

  • The outlook for the company is negative, reflecting expectations that its “operational performance will remain weak over the next 12-18 months due to economic uncertainty, industry headwinds and company specific operational challenges despite the ‘improving its capital structure, “said S&P.

Dive overview:

In the context of its recent bankruptcy proceedings, the parent company J. Crew and Madewell, now named “Chinos Intermediate 2”, has significantly reduced the massive debt that had undermined the capacity of the namesake brand to recover and the capacity for growth of the healthier but smaller brand.

J. Crew provided about 70% of sales for the company last year, Madewell, which posted double-digit performance from 2018 to 2019, accounting for more than 20%, thanks to what S&P analysts called of “merchandise that resonates with its millennial customer segmentation,” according to the S&P Global press release.

The company also noted that Madewell had seen a significant expansion of its stores during the same period, although other observers have warned that Madewell might go too far with that. And S&P Global analysts said they expected growth to return next year, but even with lower debt “we believe the risk of earnings pressure will continue.”

According to this analysis by S&P’s Mathew Christy, Helena Song and Andy Sookram, the fragile apparel market and the uncertainty of the ongoing pandemic will make it difficult for the company to make great strides in any turnaround. .

“Chinos’ operating performance has been historically volatile, a trend we expect to continue over the next 12-18 months,” they wrote, citing last year’s decline in adjusted EBITDA margin as more from 400 basis points to 11.7% in 2019, compared to 15.9%. in 2015. “We attribute this primarily to merchandising errors, product discounts and promotions, as well as lost customers at J. Crew. Additionally, we believe these trends have been exaggerated due to the coronavirus pandemic. “

Analysts describe the specialty clothing market as “highly fragmented and competitive,” with downward trends hitting mid-price clothing retailers particularly hard and the pandemic is accelerating them.

“Competition in the industry has intensified in recent years, with the escalation of threats from fast fashion and online retailing, as well as the continued decline in mall traffic,” they said. note.

The upcoming holidays threaten to inject even more precariousness into J. Crew’s fortunes, in large part because of the pandemic. A second wave could reintroduce more temporary store closures, which S&P says could “slow down or interrupt performance recovery. “


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