J. Crew Files For Bankruptcy As Covid Chaos Crushes Retailers

Update (May 4): J.Crew Group, Inc. filed for bankruptcy protection on Monday morning, unable to revive sales during the pandemic as much of the retail brick and mortar industry has been crushed by lockdowns. 

The New York-based clothing chain saw its parent company, Chinos Holdings, file for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Eastern District of Virginia. As part of the reorganization, top creditors will seize control of the company by converting $1.65 billion of its debt into equity. The company secured $400 million in new financing from existing lenders, including Anchorage Capital Group, L.L.C., G.S.O. Capital Partners, and Davidson Kempner Capital Management L.P., among others. 

The reorganization will allow the company to "restructure its debt and deleverage its balance sheet, positioning J.Crew and Madewell for long-term success," the company said in a press release. 

"This agreement with our lenders represents a critical milestone in the ongoing process to transform our business," Jan Singer, J. Crew's chief executive, said in a statement.

"Throughout this process, we will continue to provide our customers with the exceptional merchandise and service they expect from us, and we will continue all day-to-day operations, albeit under these extraordinary COVID-19-related circumstances. 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," Singer said. 

The pandemic has been absolutely disastrous for the retail industry. J.Crew was already suffering before lockdowns went into effect in early March. The company nearly avoided default in 2017, with a financial restructuring that shielded its Madewell brand from creditors.

Retailers have furloughed employees and shuttered stores as lockdowns have swept across the country. A March filing showed the company had 182 J. Crew stores, 140 Madewell stores, and 170 factory stores. 

J. Crew is not the only retailer on the brink. We suspect more bankruptcies could be seen this year.

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Apparel company J. Crew may file for bankruptcy as soon as this weekend, according to CNBC, which notes that the privately held company is scrambling to secure $400 million in financing to fund operations after filing.

CNBC's sources, which spoke on condition of anonymity due to the disclosure of confidential information, say the plans are not yet finalized, and that the timing of the filing could change.

The New York-based retailer had already been struggling under a heavy debt load and sales challenges, as it suffered criticism that it fell out of touch with its once-loyal customers. In the past few years, the brand lost both its longtime design chief, Jenna Lyons, and famed retail executive Mickey Drexler.

Those challenges have been exacerbated by the coronavirus pandemic that has forced stores to shutter, throwing the retail industry into a state of disarray. -CNBC

The company currently operates 182 J. Crew retail stores and 140 Madewell stores aimed at a younger demographic, which was launched four years ago in the hopes of spinning it off in an IPO which could have helped surmount its crippling debt. The company faced pushback from creditors.

J Crew stunned Wall Street when it swung to a profit of $1.5 million for the fiscal year ended Feb. 1, compared with a $74.4 million loss a year earlier. Total revenues increased 2% to $2.54 billion, though gains were largely driven by the company's Madewell denim-focused brand, while sales at J Crew have mostly languished.

According to Moody's, J. Crew had roughly $2.5 billion in sales for its year ending Feb. 1, and an estimated $93 million in total liquidity as 2021 debt maturities approach. In 2011, the company was acquired by TPG Capital and Leonard Green & Partners for $3 billion.

The preppy retailers now-former CEO and longtime creative engine Mickey Drexler stepped aside in 2017 follow a debt swap that staved off a bankruptcy filing, and although his successors have at least managed to wring more growth out of Madewell, the leverage buyout that took the company private more than ten years ago left it with more debt than it can reasonably manage: A nearly $1.7 billion albatross.

Like every other US retailer, J Crew shut its stores in March along with most of its competitors. Sales have plunged, though some see green shoots in some preliminary foot-traffic data.

The company has laid off tens of thousands of workers, and it's unclear how many of its stores will be operational when all of this is over.

When it became clear in March that the Madewell IPO wasn't going to happen, J Crew started negotiating with a group of lenders as it scrambled to find capital to pay off a loan maturing later in 2020.

The company, which has been working with advisers from investment bank Lazard and law firm Weil Gotshal & Manges, has a $4 million payment due at the end of April which it says it cannot make.

The company restructured its debt outside of bankruptcy in 2017 in a controversial deal that swapped $500 million of bonds due in 2019 for new securities backed by the intellectual property behind the J.Crew brand. Its lenders include Anchorage Capital Group LLC and Blackstone Group Inc.’s GSO Capital Partners LP.

The company, which was founded in the early 1980s as a catalog retailer, has long been synonymous with the preppy look in the US.

Of course, this is just the latest bad news for the commercial real estate market and, by extension, the CMBX market which has already been battered by the crisis, making one newly minted Florida billionaire even richer.

While J Crew is more of a specialized retailer, mall anchor tenants - Neiman Marcus, JC Penny -  have been hit especially hard by the outbreak, as malls are transformed into ghost towns as whether or not they can reopen after the crisis will depend entirely on the government. Neiman Marcus is reportedly also in the process of finalizing talks with lenders to allow its stores to continue operating as it prepares a bankruptcy filing. And JC Penney, which is also reportedly preparing to file, is in talks for $1 billion in bankruptcy financing.

But as one twitter wit joked, the company might want to consider updating its website.