J. Crew Files for Bankruptcy as the Coronavirus Crisis Slams Retail
J.Crew Group, which operates the J.Crew and Madewell brands, has become the first national retailer to file for bankruptcy protection during the coronavirus pandemic, which brought on a surge of temporary store closings.
J. Crew had been struggling before COVID-19, saddled with a huge debt load of $1.7 billion, some of it stemming from when private equity firms saddled the retailer with debt in a leveraged buyout. And, while it is the first major U.S. retailer to file for bankruptcy protection amid COVID-19, it’s certainly not the only major retailer struggling at this time. The clock is reportedly ticking for Neiman Marcus, J.C. Penney’s, and Lord & Taylor, while Macy’s is said to be looking to raise as much as $5 billion in debt to avoid bankruptcy.
Forrester said it predicts that, due to the coronavirus, global retail sales in 2020 will decline by an average of 9.6% globally, a loss of $2.1 trillion. It said U.S. retail sales will plummet $320 billion, a 9.1% dip from 2019. Even more troublesome, Forrester also predicts it will take four years for retailers to overtake pre-pandemic levels.
"COVID-19 is significantly impacting the global retail landscape," said Michael O'Grady, principal forecast analyst at Forrester. "Retail categories like grocery and essential consumables are performing well, while other categories like fashion, beauty and cosmetics are seeing a marked decline in consumer spend.”
“To navigate the crisis, retailers need to manage their costs and drive their e-commerce sales and services as much as possible,” he continued.
J.Crew Group has 181 J.Crew stores, 140 Madewell stores, and 170 factory stores, as well as online operations at jcrew.com, jcrewfactory.com, and madewell.com.
“Like many retailers, J.Crew had been facing increasing pressure over the last ten years as it has continued to accrue debt, despite seeing success in opening new locations and driving growth for Madewell,” commented Kelly Lynch, retail solutions manager at ActiveViam. “COVID-19 has significantly exacerbated J.Crew’s underlying issues, which has unfortunately made it the first bankruptcy casualty of the pandemic crisis within the legacy retail space – even as rumors continue to swirl about the solvency of J.C. Penney, Neiman Marcus and others.”
Now, J.Crew Group’s parent company Chinos Holdings filed for Chapter 11 protection in the federal bankruptcy court for the Eastern District of Virginia. It said it has reached an agreement with its lenders in which the lenders will convert approximately $1.65 billion of its debt into equity.
As part of the announced agreement, Madewell will remain part of J.Crew Group and Libby Wadle will continue as CEO of Madewell.
"This agreement with our lenders represents a critical milestone in the ongoing process to transform our business with the goal of driving long-term, sustainable growth for J.Crew and further enhancing Madewell's growth momentum," said J. Crew Group CEO Jan Singer. “As we look to reopen our stores as quickly and safely as possible, this comprehensive financial restructuring should enable our business and brands to thrive for years to come."
J. Crew Group said it will continue day-to-day operations amid extraordinary COVID-19-related circumstances. However, its future remains in question.
“I suspect that decreased competition in apparel will allow surviving retailers to invest in technology when the crisis levels off,” Lynch continued.
For now, the company has secured commitments for a debtor-in-possession financing facility of $400 million and committed exit financing provided by existing lenders Anchorage Capital Group, L.L.C., GSO Capital Partners and Davidson Kempner Capital Management LP, among others. The DIP financing, combined with the company's projected cash flows, is expected to support its operations during the restructuring process.