J. Crew Group Inc. got a little good news on the bottom line in the fourth quarter, but it might not be enough to sustain the retailer for long.
That’s because J. Crew is fighting off all that ails retail — from distracted consumers to decreasing foot traffic — while also managing a heavy $1.5 billion debt burden and fighting with lenders in New York State court.
Operationally, the plan is to focus on the retail basics: Be mindful of expenses while giving shoppers what they want — a trick in the best of times.
“While the overall retail environment remains challenging, we continue our disciplined management of expenses and inventory and remain focused on delivering the very best, iconic J. Crew and Madewell products our customers love across all channels,” said Millard “Mickey” Drexler, chairman and chief executive officer. “As a team, we are taking important steps to drive improved operational excellence across the company.”
That emphasis has helped the company pick itself up somewhat.
Fourth-quarter profits totaled $1.1 million and compared with year-ago losses of $7 million, while adjusted earnings before interest, taxes, depreciation and amortization rose to $51.5 million from $44 million.
Total revenues for the three months ended Jan. 28 fell 2.2 percent to $694.9 million from $711 million, with a 5 percent decline in comparable-store sales.
The picture was more dour for the full year, when losses narrowed to $23.5 million from $1.2 billion and revenues slipped 3.2 percent to $2.4 billion from $2.5 billion — with a 7 percent comp-sales decline.
J. Crew has been working hard to do more with less. Inventory per square foot was down 18 percent from a year earlier at the close of 2016.
It was the Madewell division that continued to deliver the growth, but it is not yet big enough to buoy the whole company — or fix its debt dynamic. Madewell’s sales increased 14 percent to $341.6 million last year as J. Crew’s fell 6 percent to $2 billion.
The trend has remained tough in the first seven weeks of this fiscal year, with total company comps down 11 percent, driven by a 14 percent drop at J. Crew, mitigated somewhat by a 7 percent gain at Madewell.
J. Crew, which Drexler took private with TPG and Leonard Green for $3 billion deal in 2011, paid $79.8 million in interest expense last year and expects to pay about the same this year.
The company has been looking for financing alternatives that would help it free up its balance sheet, arguing to a New York State judge that its lenders are trying to hold it “hostage.”
J. Crew is asking for the court to sign off on its restructuring late last year, which put 72 percent of the J. Crew U.S. trademarks, valued at $250 million, into a separate subsidiary and out of reach of lenders.
That case is winding its way through the legal system now, but could be resolved between the parties.
In a filing with the Securities and Exchange Commission, J. Crew detailed a proposed debt exchange with holders of the firm’s debt, which made a counter offer.
According to an analysis by Reorg Research: “In each case proposals contemplate an exchange of the [payment in kind] notes for new ‘IPCo’ notes as well as other consideration. For the IPCo notes, the company contemplates $200 million of principal versus the noteholders’ $250 million, and the noteholder proposal also considers exchange consideration including $200 million in preferred stock. The IPCo debt the company proposes is $200 million in IPCo notes bearing a 9 percent coupon versus the lenders proposal of $250 million in notes bearing a 15 percent coupon. The company proposes a 5 percent interest in [parent company] Chinos Holdings Inc. while the noteholders propose a 5 percent ‘equity’ interest in an unspecified entity. In both proposals, the IPCo notes are set to mature six months after the company’s term loan, which matures March 5, 2021. The company proposes that the notes be redeemable at par at any time while the noteholder proposal calls for no redemption prior to maturity. In both cases, the exchange offer is to have a 95 percent participation threshold.”
Michael Nicholson, president, chief operating officer and chief financial officer, walked investors through the company’s fourth-quarter release on a brief conference call Tuesday that was largely routine and did not include a question-and-answer session.
“As a team, we are focused on controlling what we can control in what remains a dynamic retail consumer and macroeconomic environment,” Nicholson said. “We are continuing our thorough assessment of the business as we begin to scope several key strategic opportunities that we expect to positively impact our brands over time.”
He said J. Crew’s key priorities for 2017 focus on how it approaches design and product, marketing, real estate, sourcing and supply chain and expense management.
On the design front, he said: “We are focused on continuing to evolve our creative and design direction ensuring that we make even more integrated decisions that help drive the business going forward. Additionally, we will look for opportunities to design to value without compromising our quality or iconic style.”
Nicholson said the company’s stores are “a strategic part of our business and will remain an important component of our omnichannel business model.”
He said the firm would make “prudent decisions to close stores that do not meet profitability hurdles or detract from our focus and brand, and invest in locations that serve our customer with a personalized approach and convenience they are looking for.”
J. Crew ended the year with 575 stores, having added a total of 24 doors, which included the closure of seven J. Crew stores and two of its Factory doors. This year, the company expects to close at least 20 stores across its portfolio while adding others and ending with 567 doors.
For all of 2017, the firm is looking for J. Crew’s comps to fall by low- to mid-single digits, while Madewell is seen comping up in the low- to mid-single digits. Capital expenditures are expected to range from $50 million to $60 million.