Photographer: Marlene Awaad/Bloomberg

J. Crew Seeks Debt Swap to Buy Time as Sales Dive Continues

  • Retailer reports a decline in same-store sales and revenue
  • Company offers to exchange 2019 notes for debt due in 2021

J. Crew Group Inc., struggling from almost three years’ worth of declining sales, asked bondholders to extend the maturity of $566.6 million in notes and said it planned to settle a lawsuit filed by lenders.

The debt-laden retailer started a private offer to exchange 2019 pay-in-kind notes for an equity stake and bonds that mature in 2021. At least 95 percent of bondholders must accept the proposal for it to proceed.

The retailer is struggling to adjust as shoppers flock to online commerce amid changing tastes. It announced last week that long-time Chief Executive Officer Mickey Drexler is leaving his post and James Brett, the 48-year-old president of Williams-Sonoma Inc.’s home furnishings chain West Elm, is taking the helm in an effort to contain the damage.

J. Crew’s more than $566 million of 7.75 percent pay-in-kind notes due 2019 climbed 8.5 cents to 60 cents on the dollar at 10:56 a.m. Tuesday in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. 

J. Crew must now convince its lenders to agree to the debt transactions, Bloomberg Intelligence retail analyst Noel Hebert said.

“To me, I think everybody’s incentives are moving to be properly aligned, and it’s something that should be able to get done,” Hebert said. “It’s just a function of, has the investor changed such that they’re just more resistant to giving any ground whatsoever?”

Sales in stores open at least a year, plus e-commerce and shipping fees, fell 9 percent in the quarter that ended April 29, J. Crew said Monday in a separate statement. Total revenue dropped 6.3 percent to $532 million.

In addition to the debt tender, a second offer will be made to J. Crew’s term-loan lenders asking them to dismiss the pending litigation against the company in exchange for meaningful compensation. The New York-based retailer is facing a battle with those lenders, who have accused it of unfairly moving its valuable brand name out of reach when it put its intellectual property assets in an unrestricted subsidiary last year. The new bonds will be issued from that subsidiary and use the IP assets as collateral.

While the exchange would benefit pay-in-kind bondholders and J. Crew’s owners, the amendment to the company’s term loan may not be as favorable to those lenders, Kirk Ludtke, an analyst at Cowen and Co., said in a note to clients today.

“We recognize that the term loan’s challenge of the IP transfer was an uphill battle,” Ludtke said. “But we are not sure why holders of the term loan, that do not have a position in the PIK Notes, would support the proposal made public yesterday.”

Madewell Sales

One bright spot in the quarter was the Madewell brand of casual women’s apparel. Comparable sales increased 10 percent in the quarter from a year earlier and sales grew 17 percent to $84.7 million. That’s still far less than the $428.5 million the ailing namesake J. Crew brand generated.

The company’s cash grew to $104.6 million at the end of the quarter from $54.7 million a year earlier, while total debt narrowed less than 1 percent to $1.5 billion. J. Crew reaffirmed it’s full-year outlook of $200 million in earnings before interest, tax, depreciation and amortization as “achievable.”

“While we are disappointed with our first-quarter earnings, we are optimistic regarding the work we have underway to improve the business,” Drexler said in the statement. He cited J. Crew’s “clear vision” and said Brett will position the retailer for “long-term success.”

Drexler is staying on as J. Crew’s chairman.

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