Looks from Madewell

Madewell has gone from J. Crew Group’s side hustle to growth engine to back-up parachute.

Now the struggling group is reaching for the rip cord, hoping the Madewell parachute and potential second-half IPO are big enough to cushion its decline.

A complete success of an IPO would satisfy debtholders, give a second (or third, or fourth) lease on life to J. Crew and eventually pay a return to the company’s private equity backers, TPG Capital and Leonard Green & Partners.

That’s a big ask for Madewell, though, which has been growing strongly with a 25 percent comparable sales increase last year, but still has revenues of just $529.2 million.

J. Crew is carrying a total of $1.7 billion in debt, the biggest portion of which comes from the company’s $1.4 billion term loan due in 2021. The term loan is partially secured by Madewell assets and includes a provision giving lenders the right to approve a Madewell deal, unless they’re paid off in full.

Just how much Madewell is worth is a question of growing importance as J. Crew explores “strategic alternatives,” including the possible public offering of division in the second half of the year.

Raya Sokolyanska, a debt analyst at Moody’s Investors Service, said: “Madewell is in a strong growth stage and the company would claim it’s underpenetrated and they’re aiming for $1 billion of revenues — so doubling revenues in the medium, intermediate term. There are certainly opportunities to grow it, but it’s not clear how big it can really be and how long that growth trajectory [will last].”

Sokolyanska compared Madewell with its larger denim rival Levi Strauss & Co., which went public last month and is trading at an enterprise value to earnings before interest, taxes, deprecation and amortization multiple of 13.9 times.

“Madewell is no Levi’s,” she said.

And there are other offerings in the works. Revolve has filed its paperwork for an IPO. Gap Inc. is spinning off Old Navy and VF Corp. is splitting off its Lee and Wrangler brands into a company called Kontoor.

The exact plans for Madewell are still uncertain as J. Crew tests the market. But the company has to move quickly.

Mathew Christy, a debt analyst at S&P Global Ratings, said the company has “significant structural issues” and likely has to do something to restructure its finances in the next 12 months.

And the stock market, while seemingly open to fashion-based offerings right now, might not remain so welcoming.

“Who’s to say exactly what the market’s going to look like in the second half of the year,” Christy said. “Until the deal is done, we have to look at the company as a combination. Madewell’s still performing well. J. Crew’s still a laggard.”

Whether Madewell is spun off completely or partially, there’s still the question of what to do with the company’s namesake brand, which for a long time was very much tuned into the zeitgeist, but has missed the mark recently.

That kind of corporate ebb and flow is part of the reason J. Crew nurtured Madewell, which was picked up and developed by former chief executive officer Millard “Mickey” Drexler and expanded its business with a more denim-based brand.

In life and business, plans don’t always pan out and things change and it’s smart to have something to fall back on or other avenues to success.

“Times are really tough in retail,” said consultant David Bassuk, managing director at AlixPartners, speaking generally. “And because of that, when businesses have multiple banners, multiple brands, they’re looking for some way to monetize and drive value. Spinning out and going public is one option — to pull out a crown jewel of a business and value that piece independently.”

Bassuk said companies are often very strategic as they grow, picking up new businesses and realizing cost synergies and growing operations while they can. And then when it makes sense, they can reverse course and monetize.

“It’s a natural corporate migration and journey,” he said.

In some cases, it just feels like a free fall.

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