March 25 (Bloomberg) -- J. Crew Group Inc., the retail chain owned by TPG Capital and Leonard Green & Partners LP, reported a 42 percent drop in fourth-quarter profit amid a broader decline in shopping-mall traffic.
Net income tumbled to $5.92 million in the quarter, down from $10.2 million a year earlier, the New York-based company said yesterday in a statement. Still, revenue grew almost 7 percent to $686.2 million in the period, which ended Feb. 1.
The fourth quarter was “a challenging operating environment across the industry,” Stuart Haselden, J. Crew’s chief financial officer, said on a conference call. “I would point to a few factors: traffic, the promotional activity across the industry and weather.”
J. Crew is working to bounce back from an industry slump that hurt holiday sales and triggered a wave of discounting among rival retailers. At the same time, the company is contemplating an initial public offering for later this year, according to people familiar with the matter. It also held early-stage talks with Japan’s Fast Retailing Co. about a sale of the chain, people said in February.
J. Crew, whose clothes have been worn by celebrities such as Michelle Obama, was acquired by TPG and Leonard Green more than three years ago. The chain could fetch a valuation of as much as $5 billion in a potential public offering, one person familiar with the situation said.
J. Crew has $1.6 billion in total debt. Moody’s Investors Service rates J. Crew at B2, five levels below investment grade due to its high debt burden, Scott Tuhy, a senior credit officer at the credit rating company, said in an interview. When the retailer was still public, Moody’s rated it as high as Ba1, one level below investment grade, in April 2010.
“While they did well considering how promotional the holiday was, they are a mall-based retailer and they’re not immune to traffic trends in the mall,” Tuhy said by phone. “Clearly if you see a weaker performance, there’s just less room for error for a company with a higher debt burden.”
Tapping the IPO market would mean following in the footsteps of other private-equity backed retailers. Burlington Stores Inc., which is backed by Bain Capital LLC, is up 83 percent since its October debut. Vince Holding Corp., the apparel company backed by Sun Capital Partners Inc., has gained almost 23 percent since its November debut.
J. Crew has begun interviewing banks about an IPO, people familiar with that matter said last month. A $5 billion valuation would be a big jump over what TPG and Leonard Green paid for the chain in November 2010. Net of cash, the value of that deal was about $2.64 billion, data compiled by Bloomberg show. At the time, the takeover drew complaints from shareholders that Chief Executive Officer Mickey Drexler didn’t get a fair price for the company.
The investors sued, alleging that Drexler and other J. Crew executives stood to make millions of dollars in the deal, prompting them to only half-heartedly seek higher bids, court papers show. J. Crew settled the suit for $16 million, in addition to $6.5 million in legal fees.
The company also said yesterday that it will incur a refinancing loss of $37 million in the first quarter.
J. Crew will open two additional stores in London in 2014 and its first two Asia locations in Hong Kong in May.
Going public or a sale to a strategic buyer could provide a financial boost as the company tries to expand overseas.
“One of the key growth plays for them going forward is clearly international,” Mary Brett Whitfield, a senior vice president for industry consulting firm Kantar Retail, said in an interview. “J. Crew is looking for the international expertise as well as the capital to do that.”
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