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J.Crew’s chapter 11 bankruptcy filing may have surprised those who still purchase their cardigan sweaters and chinos from the retailer, but the company was at serious risk even before the COVID-19 pandemic due to sky-high levels of debt and a failure to keep up with fashion trends, experts said Monday.
“Even if there were no pandemic, it wouldn’t have changed anything,” said Eric Snyder, partner at Wilk Auslander and chairman of the firm’s bankruptcy department.
The company said it has secured $400 million in debtor-in-possession financing from its lenders to help it restructure. The retailer said it reached an agreement with lenders holding about 71% of its term loan and about 78% of its IPCo Notes to convert about $1.6 billion of the company’s debt into equity.
Lenders include Anchorage Capital Group, L.L.C., GSO Capital Partners and Davidson Kempner Capital Management LP, among others.
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As part of the agreement, the company’s Madewell unit will remain part of J.Crew and will not be spun off, as previously planned.
The $1.65 billion in debt that J.Crew is saddled with dates back to a leveraged buyout announced in 2010.
“Every retailer is facing the same problem but not all retailers in an equal position,” said Alan Behr, chairman of the fashion and luxury goods practice at the law firm Phillips Nizer, noting the company’s weakened balance sheet in the face of nationwide store closures due to the coronavirus pandemic. Other retailers like Nike Inc. NKE, +0.24% are in far better shape and are expected to gain market share in the crisis.
Neil Saunders, managing director at GlobalData Retail, said the chapter 11 filing is something that the company could have done years ago. However, the COVID-19 pandemic, the shift in consumer spending and the shuttering of stores has made the landscape too difficult for J.Crew to navigate.
“[T]he coronavirus crisis has forced the situation to a head,” he wrote in a note. “It has also given J.Crew some justification to ask lenders to make the unpalatable choice of having their debt converted into equity. In the current trading environment, the alternative would have been default, putting J.Crew on the path to liquidation.”
But other problems have arisen over the years. Where J.Crew was once known as a stylish brand with big names like Jenna Lyons and Mickey Drexler at the helm, word of the bankruptcy brought out snarky responses on Twitter about the perceived out-of-fashion and overpriced merchandise that the company now sells.
“They missed the athleisure trend entirely,” said Jessica Ramirez, retail research analyst at J. Hali & Associates, saying the company’s failure to participate in what is still the top trend in fashion is one of the company’s “self-inflicted problems.”
“It’s a category that J.Crew could have easily participated in,” she said.
GlobalData’s Saunders says the brand is in need of reinvention, a task made more challenging by the subdued and highly-promotional retail market.
J.Crew isn’t the only retailer seeing its vulnerabilities exacerbated by COVID-19. Wilk Auslander’s Snyder is expecting J.C. Penney Co Inc. JCP, -0.70%, which is reportedly seeking $1 billion in bankruptcy funding, to file for bankruptcy by the end of the year.
A Fitch report on retailers that are likely to default thanks to heightened risks in the pandemic includes GNC and Lands’ End, which have maturities in 2020 or early 2021. J.C. Penney and Neiman Marcus have recently skipped interest payments, “and a restructuring at both could occur in the near term,” said David Silverman, Fitch senior director.
One benefit of the industry turmoil will be reduced competition, which will give stronger retailers the opportunity to invest in areas like technology. Advances that will upgrade warehouses, provide real-time data about shifting consumer preferences and other digital tools will be in demand, said Kelly Lynch, retail solutions manager at ActiveViam, an analytics platform for retail and finance organizations.
“COVID-19 has accelerated the digital movement and will undoubtedly increase the need for tech investments as we look for ways to dodge the impact of a crisis that has kept most of us home and hedge our risk for the possibility of something similar happening again,” she said.
Additional reporting by Ciara Linnane.
