J Crew is first of many retail casualties

Even as some retailers begin to open stores again, the pain across malls and main streets continues to take its toll.
J Crew Group Inc said it would begin pre-arranged Chapter 11 bankruptcy proceedings and enter into a $1.65 billion debt-for-equity swap with its lenders, becoming the first major US retailer to succumb to the economic convulsions caused by the coronavirus pandemic. It won’t be the only casualty.
Other chains are grappling with the same issues: heavy debt loads, compounded by the damage done from locations closed for weeks. Neiman Marcus Group Inc is closing in on a bankruptcy deal with a group of lenders, Bloomberg News reported, citing people with knowledge of the matter, and JC Penney Co is reportedly in talks on a loan that would fund it through a restructuring.
Meanwhile, Victoria’s Secret-owner L Brands Incsaid that it agreed to terminate plans to sell a majority stake in the innerwear chain
to private equity firm Sycamore Partners. Jefferies analyst Randal Konik had warned last month of potential medium-term solvency issues at L Brands after Sycamore sued to get out of the transaction, citing a collapse in sales and looming debt maturities.
Every brand has its own story. In the case of J Crew, it was one of the first mainstream US retailers to gain real traction with the fashion crowd, and in its heyday was also ahead of its time in areas such as store design.
The leadership of former chief executive Mickey Drexler and creative director Jenna Lyons took its preppy styles from classic to cutting edge, all helped by the brand being a favourite of Michelle Obama. But its trendy designs eventually alienated some customers, and when the power partnership came to an end in 2017, it never regained its stride. With cheaper competitors such as Inditex’s Zara and a resurgent Ralph Lauren Corp at the top end, J Crew had to rely on incessant discounting.
J Crew had hoped in recent months to spin off its faster-growing, denim-focussed Madewell arm as it sought to cut borrowings of almost $1.7 billion as of February. But plans for the initial public offering were scuppered by the pandemic, and it was left struggling to deal with its debt, a legacy from its 2011 leveraged buyout by TPG Capital and Leonard Green & Partners.
Neiman Marcus, meanwhile, was acquired in a
$6 billion leveraged buyout by Ares Management LLC and the Canada Pension Plan Investment Board almost six years ago. The chain has been in a race with its luxury rivals, such as Nordstrom Inc to turn stores into temples of indulgence. That all takes investment, made harder with a debt load of $4.3 billion, according to Bloomberg News. JC Penney is at the other extreme. It must deal with shabby stores as it struggles to stay relevant while managing total borrowings of $3.6 billion excluding store leases as of February 1.
All three chains are facing pressure from online rivals. For JC Penney, that’s Amazon. For J Crew and Neiman, it’s the likes of Richemont’s Net-a-Porter.

—Bloomberg