On May 4, 2020, J.Crew (NYSE: JCG) group filed for chapter 11 bankruptcy. This will deleverage the firm and convert the $1.7 billion leveraged buyouts into equity. The company plans on reopening stores post lockdown.
J.Crew is the first major retailer to file for bankruptcy under chapter 11 and not chapter 7. Bankruptcy under chapter 7 calls for the company to liquidate and sell off its assets to pay off the debtor. Whereas under chapter 11, the company can change the terms of debt of the debt without having to sell off the assets.
This decision of the company came after their plan to issue IPOs for their fast-growing women’s brand Madewell was derailed by the coronavirus outbreak.
But the pandemic isn’t the actual reason for the bankruptcy filing. J.Crew has been struggling with debt since 2011 when it was acquired by private equity firms TPG Capital and Leonard Green & Partners for $3 billion.
The company has also struggled to keep up with the accelerating trend. Ecommerce and the rise of fast fashion brands impacted the company. Jcrew couldn’t keep up with the changing customer taste. Moreover, when the government closed down the non-essential services it also handed a large chunk of market share to e-commerce giants like Amazon and the likes.
The company had shown some highs in 2019 after being in lows in recent years.
Total revenue for 2019 was $747.2 million, which showed a growth of 9% compared to Q4 of 2018. Out of these, $516.8 million of the total revenue was by J.Crew and $178.1 million was that of Madewell.
The gross margin increased to 38.3% from 22.4% in Q4 2018. Net income was $1.5 million compared with a net loss of $74.4 million in the fourth quarter last year.
Among others, retailer considering filing for bankruptcy are Neiman Marcus and JC penny.
This chapter 11 filing will release the company of $150 millions in annual interest payments. The company has secured $400 million in debtor-in-possession financing to fund operations during the restructuring process. In the meantime, the company will be taking orders as per usual.
The company plans on reopening its 181 J.Crew retail stores, 140 Madewell stores, and 170 factory stores after the lockdown is lifted. But this comeback will only make sense if J.Crew establishes a definite position in the market. It needs to invest more in its digital channel. It needs to revamp its brand.
There was a time when J.Crew used to be known for its classic pieces. Their collection was worn by Michelle Obama multiple times. But now the brand seems to have lost the sense of where it stands. It’s not like the fast fashion brands but neither like the high-end stores. It’s in the middle and the middle is where a brand should never be. J.Crew needs to find an identity that’s more in line with what a modern retailer looks like.
J.Crew could be a brand built on the community since it can never compete with or be like Amazon. Rather than being a ubiquitous mall retailer with an expensive brick-and-mortar footprint, it could transition to being a bit more of a niche player, leaning further into e-commerce and styles that can survive waves in trends. Unless they make these necessary changes, they’re gonna face the same fate that Sears did when they tried to come back after their bankruptcy filing.