By Evan Clark
with contributions from Vicki M. Young
 on November 22, 2016
New Balance x J.Crew

J. Crew Group’s losses continued, but at a slower pace in the third quarter, while sales slipped, and the growing Madewell business was not enough to push its parent company forward.

The company’s third-quarter losses shrank to $7.9 million from $759.7 million a year earlier, when the bottom line was dragged down by goodwill as well as impairment charges to write down the value of the J. Crew name.

Revenues for the quarter fell 4.2 percent to $593.2 million from $619.4 million. J. Crew sales decreased 7 percent to $488 million as sales at Madewell increased 12 percent to $88 million.

Gross margins contracted to 38.1 percent of sales from 38.6 percent.

Millard “Mickey” Drexler, chairman and chief executive officer, said: “Our third-quarter results reflect ongoing traffic challenges and a highly promotional retail environment. While we expect these trends to persist through the fourth quarter, we continue to remain focused on driving sales productivity and carefully managing inventory and expenses. In addition, we have several key operational initiatives under way that we believe position us to regain momentum and deliver long-term growth.”

Private equity firms TPG Capital and Leonard Green took J. Crew private in a $3 billion deal in 2011, but that transaction came with a heavy debt load, which as of the end of the quarter amounted to $1.5 billion.

The company has been working to find the right path forward, for instance, exiting the bridal business and linking up with New Balance for a women’s active line.

The firm has also started wholesaling the J. Crew and Madewell brands to Nordstrom.

Bondholders have worried that the company might try to separate the Madewell business from J. Crew, which is more closely tied to the underlying debt. It’s not clear that the conditions of the debt allow that at the moment, given the state of the firm’s finances.

Michael J. Nicholson, copresident, chief operating and financial officer, said in a conference call, “Our third-quarter results reflect the continuation of a challenging traffic environment, which pressured performance in our J. Crew brand. However, we continue to experience positive momentum at Madewell.”

He said the company has “begun to see tangible results from our sourcing and supply-chain strategies and expect to make further progress on this and other key operational initiatives as we move forward.”

He added that the company is now estimating 13 store closures in the fourth quarter, and “continues to explore opportunities to improve the full profitability of our remaining stores.”

As for Madewell, Nicholson said the comps increase of 4 percent “reflects continued strength in product offerings, value and shopping experience.”

For the fourth quarter, Nicholson said the trends are expected to remain challenging throughout the holiday selling season. He said the company remains “intently focused on driving sales productivity and managing inventory and expenses as we continue to evaluate all opportunities across our business that will allow us to regain top-line momentum, drive efficiencies and position our company for long-term profitable growth.”

Vincent Zanna, treasurer and vice president, said cash and cash equivalents were $38 million in the third quarter, while total debt was $1.5 billion, about flat with last year, excluding $543 million of Holdco pay-in-kind toggle notes. In October, the company said the issuer of the notes will make the May 1 interest payment at the PIK interest rate of 8.5 percent instead of paying cash. The PIK election increases the outstanding principal balance of the PIK notes by $23 million to $567 million.

Zanna also said the company on Nov. 17 amended its $350 million ABL Facility by extending the maturity date to 2021 from 2019.

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