J. Crew Group is clearing the decks, getting ready for the arrival of its next chief executive officer, James Brett, who takes the helm from Millard “Mickey” Drexler next month.
There’s plenty of work to be done as sales and adjusted profits continue to shrink.
The company, which is carrying $1.5 billion in long-term debt, late Monday introduced a plan to remake its balance sheet through an exchange offer to bondholders and an update to its term loan that would end its legal battle with lenders and push its next big maturity back to 2021.
Meanwhile, the retailer plans to close at least 20 stores this year and, having already made big changes in its design leadership, is cutting 150 workers from its headquarters staff and not filling 100 open jobs, driving annual pre-tax savings of about $30 million.
Also in the works is a reinvention of the monthly category business, $50 million in benefits this year from supply chain adjustments and explorations for a broader wholesale business, which has already brought the J. Crew and Madewell brands to Nordstrom.
These sweeping changes and broad-based weakness in the general retail market are reverberating in the company’s financial statements.
Impairment charges and severance contributed to a first-quarter loss of $123.3 million, compared with an $8 million deficit a year earlier. Adjusted earnings before interest, taxes, depreciation and amortization contracted to $26.6 million from $45.4 million and total revenues decreased 6 percent to $532 million with a 9 percent drop in comparable-store sales.
Drexler acknowledged: “While we are disappointed with our first-quarter earnings, we are optimistic regarding the work we have under way to improve our business. We have a clear vision and action plan in place to meet our customers’ needs — wherever and however they choose to shop. I look forward to transitioning my role to chairman and to working with our new ceo, Jim Brett, as he takes the reins in July and continues to position J. Crew for long-term success.”
Perhaps the most immediate and pressing barrier to realizing that success is the company’s debt load.
The private exchange offer would have affiliates of the company offer to buy all the $566.5 million in outstanding payment-in-kind notes for $250 million in new secured notes backed up by a subsidiary holding most of the intellectual property tied to the J. Crew name, as well as $190 million in new preferred stock issued by the retailer’s corporate parent and 15 percent of the firm’s common stock.
Separately, the plan calls for holders of the term loan, which is trading at about 70 cents on the dollar, to receive a $150 million payment at par as well as some adjustments.
Investors holding 67 percent of the PIK notes have already signed on to the exchange, which requires 95 percent buy-in to be approved. And investors holding 28 percent of the term loan have already agreed to that part of the plan, which requires just over 50 percent buy-in to fall into place.
The plan would end the litigation in New York State court that started this year after investors began agitating against the company’s move to place most of its trademark in a separate subsidiary.
All together, the plan would dilute the equity holdings of TPG Capital and Leonard Green & Partners, which took J. Crew private in a $3 billion deal in 2011, but also give the company some much-needed breathing room.
Michael Nicholson, president, chief operating officer and chief financial officer, told investors on a conference call that the plan was hashed out over “many months of intense deliberation and negotiation.”
“Strategically, we see these actions as important to our overall effort in positioning the company for long-term success,” he said. “Addressing our nearest-term maturity removes an overhang in a challenging market environment and provides our company and management team a clear path to execute on our business plan.”
Still, Brett has his work cut out for him at J. Crew, which is adjusting to the new realities of the market, having brought its design focus back squarely to the fashion basics it has long been known for.
Word that the torch was passed to Brett, a respected merchant with experience at Urban Outfitters Inc., Anthropologie, J.C. Penney Co. Inc. and more, was greeted by investors as a sign that J. Crew’s owners are sticking with their investment and working to turn it around.
Brett’s compensation for just his first year at the retailer includes a base salary of $1.3 million, an annual bonus of at least 150 percent of that salary, a signing bonus of $1.3 million, a potential performance bonus of $4 million (the first half of which is based on the company generating annual adjusted earnings before interest, taxes, depreciation and amortization of at least $250 million) and stock, according to a regulatory filing.
Citi debt analyst Jenna Giannelli applauded aspirations implied by the compensation package.
“I was happy to see his incentive comp was tired to aspirational, but not unachievable levels of EBITDA,” Giannelli said.
She said investors have been looking for signs of traction in the marketplace and added: “’I’m not looking to invest in a retail story that is just cost savings, I need to believe that comps will turn around.’”
J. Crew has been addressing the shortfall in its business and has already made a slate of design changes with the departure of Jenna Lyons and Somsack Sikhounmuong’s promotion to chief design officer.
Those changes will start to become more apparent as Brett settles in this summer.
And despite the troubles in retail and at J. Crew, Giannelli said the new ceo has plenty to work with. Even though she said the women’s category is overstored and struggling mightily, there’s still a general belief that J. Crew has a core customer and a brand that resonates.
“If anyone was going to have an opportunity to turn around, it would be them of all the struggling retailers that we’re seeing,” Gianelli said.
It’s a risky situation that Brett is getting into, but one with potentially huge rewards, for his pocket book if he realizes his full bonus package and his reputation.
“Money is always a strong compelling reason for change coupled with increased responsibility,” said Elaine Hughes, founder and ceo of executive search firm E.A. Hughes & Co. “But in this case it is an opportunity to succeed one of the most legendary merchants in retail history and hopefully accelerate a great brand into a more contemporary consumer model.”
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