J. Crew Files for Bankruptcy in Spite of TPG Buyout
After years of managing a $1.7 billion debt burden, J. Crew announced in early May that it had filed for bankruptcy.
Although the company had struggled for years – including having a leveraged buyout by TPG Capital and Leonard Green & Partners in 2011 – company leaders had been optimistic about the potential for recovery until the coronavirus outbreak caused stocks to drop and brick and mortar locations to close.
J. Crew is the first major clothing retailer to file for bankruptcy during the pandemic, although other household names like J.C. Penney are also struggling financially as a result of mandated shutdowns.
In the announcement, J. Crew disclosed that the decision to file for bankruptcy will be accompanied by a financial reorganization plan which will involve ceding company control to creditors and converting $1.65 billion in debt into equity.
The news broke after weeks of negotiations between the company and lenders. Even before the pandemic closed stores temporarily, J. Crew had been struggling to stay on top of ongoing debt payments. Industry experts also critiqued the company for being slow to adapt to new trends in consumer tastes.
The good news for customers is that J. Crew intends to hold on to its popular Madewell brand, and both stores will reopen once lockdown restrictions are lifted. In spite of the company restructuring, customers can continue to order clothes and gift cards online until they can shop in person again.
J. Crew is not the only company to suffer as a result of the coronavirus outbreak. Reports from March show that clothing and accessories sales dropped by over 50% – and it is expected that the numbers for April will be even worse, as most stores were open for at least some of the previous month.
Retail companies are fighting to stay afloat by furloughing or firing employees and cutting the salaries of execs, but these strategies are unlikely to cut it for companies already struggling with debt.
According to Raya Sokolyanska, a senior analyst at Moody’s, fashion retailers face even more challenges than other companies.
Over the last few months, “these businesses have faced a huge investment need,” she said. “Having a burdened balance sheet certainly greatly diminishes their chances of doing this successfully.”
“The companies going into bankruptcy, for the most part, were companies that were struggling before COVID — we have not seen true COVID bankruptcies,” said James Van Horn, a specialist in retail bankruptcy and a partner at Barnes & Thornburg.
“Depending on how the current situation continues,” he added, “that may change.”
Source: The New York Times