J. Crew, the apparel seller known for its preppy clothing, is now the first major retailer casualty to file for bankruptcy protection since the pandemic began earlier this year.
In a statement from the company, J.Crew’s parent company Chinos Holdings filed for Chapter 11 protection Monday morning in federal bankruptcy court for the Eastern District of Virginia. Chinos Holdings said its Madewell store chain will remain part of the J. Crew Group, and added that its e-commerce businesses will continue to operate.
“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 Jan Singer, Chief Executive Officer, J.Crew Group said in a statement. “The Company has filed a series of customary “first day” motions with the Bankruptcy Court seeking to maintain its operations during the restructuring process to help facilitate a smooth transition into Chapter 11.”
It also plans to reopen stores as soon as stay-at-home orders and other health restrictions related to COVID-19 are lifted.
J. Crew company also said it had reached a deal with its lenders to convert about $1.65 billion of debt into equity. The debt stemmed from its $3 billion leveraged buyout in 2011 by private equity firms TPG Capital and Leonard Green & Partners, which one analyst cited as a major factor in its financial distress.
The $1.65 billion debt “sits on the company’s balance sheet like a millstone around its neck,” said Neil Saunders, managing director of GlobalData Retail, in a research note. “Quite simply this is crippling the business which, at operating level, is profitable.”
The preppy retailer, launched in 1947 and branded J. Crew in 1983. The retailer is known for straight silhouettes and preppy styles without the luxury price tag, was a favorite of former first lady Michelle Obama. As First Lady, Michelle wore J. Crew during her husband’s 2009 inauguration wearing leather gloves from the brand that was paired with her lime Isabel Toledo ensemble. For one of her eight features in Vogue, Michelle in 2009 wore a salmon skirt and sweater from J. Crew, and in 2012 for the Democratic National Convention, she chose to team her brocade dress by Tracy Reese with a pair of pink J. Crew pumps. In a 2010 study, J. Crew’s stock increased 25% after Michelle Obama wore J.Crew on “The Tonight Show” in October 2008.
In 2011, J. Crew became the first mass-market accessible brand to show at the tents in New York Fashion Week. Since then, the brand became known as out-of-fashion and overpriced merchandise. It also was criticized for selling its merchandise at the same prices in its Factory’s outlet stores, while failing to focus on e-commerce sales.
“Store-based retail was already struggling with internet consumption trends before coronavirus, and now will be faced with accelerated demand shifts to the internet,” Randal Konik, an analyst at Jefferies, said in a note to clients last week.
According to the Commerce Department data, clothing store sales plummeted more than 50% in March and it has grown worse since. Next week, the U.S. Commerce Department will release the April report of retail sales figures. The April report will reveal the full brunt of the pandemic because most stores were closed for the entire month.
While J. Crew is the first fashion brand to file for bankruptcy in the wake of coronavirus, it is not the only retailer dealing with financial struggles right now. J.C. Penney, Neiman Marcus, Sears, and Brooks Brothers are also companies already in financial distress before the pandemic and are expected to follow J.Crew in filing for bankruptcy protection. Several are burdened by crushing debt loads and they are also at risk from declining market share, too many stores, limited online sales, and a focus on selling discretionary items.
As of February 1, there were 193 J. Crew stores, 172 J.Crew Factory outlets, and 132 Madewell locations as of Feb. 1. It is not clear how many of their stores will reopen once the pandemic subsidies and stay-at-home orders are lifted across the nation.