Weakness at J. Crew Group Inc. has trickled down from its cash registers to its bottom line, and now its credit rating.
This story first appeared in the December 8, 2014 issue of WWD. Subscribe Today.
Both Moody’s Investors Service and Standard & Poor’s — the two main credit watchdogs — cut their ratings as the retailer reported a third-quarter net loss of $607.8 million, which included a $684 noncash impairment charge and reflected the impact of promotional activity and weakness in women’s. The brand’s revenues for the three months ended Nov. 1 increased 6 percent to $655.2 million, although comparable sales declined 2 percent.
Moody’s — which technically cut the credit rating of J. Crew’s indirect parent company, Chinos Intermediate Holdings A Inc., to “B3” from “B2” — said the downgrade “reflects J. Crew’s continued declining earnings trend stemming from weak execution in a challenging apparel retail environment, compounded by high promotional activity, inventory markdowns and cost deleveraging due to weaker-than-expected sales.”
The rating agency also drew a correlation between J. Crew’s performance and its 2011 takeover by TPG Capital and Leonard Green & Partners, which valued the company at $3 billion and left it in debt. The private equity firms have since recouped some of their investment in the form of dividend payments.
Moody’s said the company has “aggressive financial policies” and pointed to payouts to shareholders, including a roughly $500 million dividend financed by debt in November 2013 and a $197.5 million 2012 payout that came out of the company’s cash holdings.
“The company has meaningfully underperformed since the November 2013 $500 million debt-financed dividend, particularly within its J. Crew retail stores, resulting in $684 million of impairment charges booked in its third quarter,” Moody’s said.
About $2.1 billion in debt was impacted by the downgrade.
Standard & Poor’s cut its rating on the retailer to “B-minus” from “B.”
Helena Song, debt analyst at S&P, noted, “The downgrade reflects our expectation that J. Crew’s operating performance will remain under pressure for the rest of 2014 and into 2015. We believe the specialty apparel industry will remain difficult and highly promotional because of increased competition and consumer caution, and that J. Crew may not be able to adequately offset these trends.”