J. Crew Group reported that its loss for the second quarter grew to $44.2 million, and disclosed that it filed a registration statement with the Securities and Exchange for an initial public offering of Madewell.
No timing was revealed for the IPO, however.
The company said Madewell will be separated from the J. Crew brand, which will get spun off to stockholders of Chinos Holdings Inc., the parent of the J. Crew Group. Madewell will remain with Chinos Holdings. Libby Wadle will continue to head Madewell as chief executive officer following the split.
At what will become the separate J. Crew, Michael Nicholson will take on the roles of interim chief financial officer and treasurer and continue to serve in his roles as chief operating officer and interim chief executive officer. Nicholson previously served as cfo from January 2016 to August 2017.
While J. Crew for several seasons has been grappling with product issues and losing popularity, the denim-based casual Madewell brand continues to open stores and resonate with consumers.
And as the SEC filing reveals, Madewell’s performance has been very strong. The brand generated $60 million in net income last year off $614 million in sales, and $111 million in adjusted earnings before interest, taxes, depreciation and amortization.
For the first half of this year, Madewell generated $333 million in revenues, $36 million in net income and $71 million in adjusted EBITDA.
The Madewell IPO will help pay off the group’s $1.7 billion in debt, the biggest portion of which comes from a $1.4 billion term loan due in 2021. Furthermore, it will put a brighter light on that brand’s performance and strength once it is separated from the struggling J. Crew label, and leave Madewell separated and free from the big debt obligations.
The filing also indicates that Madewell has 2.6 million active customers and that 37 percent of its revenues are digital. The brand achieved positive comparable sales in 41 of the last 42 quarters.
While the spin off would help stabilize J. Crew’s balance sheet and propel Madewell to further growth, the strategy does have potential downsides, as the SEC filing indicates. Madewell will lose some of the resources of J. Crew, may have to purchase certain assets, and could experience difficulties operating for the first time as a stand-alone company.
The filing also states: “The loss of J. Crew’s scale, capital base and customer and supplier relationships may also prompt suppliers to reprice, modify or terminate their relationships with us. In addition, J. Crew’s reduction of its ownership of our company could potentially cause some of our existing agreements and licenses to be terminated.”
Madewell and J. Crew will be truly competing against each other once they separate.
Regarding J. Crew Group’s second-quarter results, the company said the net loss this year, as well as last year’s loss of $6.1 million in the corresponding period, were impacted by transactions, transformation and severance costs and a benefit related to the termination of the lease on its former headquarters at 770 Broadway in Greenwich Village to the new one at 225 Liberty Street in lower Manhattan.
Adjusted earnings before interest, taxes, depreciation and amortization were $41.8 million, compared with $54.2 million in the second quarter last year.
Total sales slipped to $538.8 million in the quarter, from $550.54 million in the year-ago period.
Comparable company sales decreased 1 percent.
Nicholson commented, “Our second-quarter results reflect our ongoing commitment to returning J. Crew to profitable growth over time. Our work to reignite the J. Crew brand with new designs, assortments and brand expressions is well under way and we remain focused on advancing our digital transformation and elevating customer engagement across channels.
“During the quarter, we launched a multiyear cost-optimization program, which is expected to generate cost savings of approximately $50 million. This program is expected to reduce overall costs and enable the company to move faster in the execution of our strategy. These actions, combined with our previously announced review of strategic alternatives, further support our initiatives to maximize value, position the company for long-term growth, and de-leverage and strengthen our balance sheet.”
By division, J. Crew sales decreased 7 percent to $399.1 million. J. Crew comparable sales decreased 4 percent.
Madewell’s sales increased 15 percent to $139.7 million. Comparable sales increased 10 percent.
Gross margin decreased to 35.6 percent of sales from 38.5 percent in the second quarter of last year.
In a conference call, Nicholson said the company this year simplified its label strategy and continues to refine the assortment to establish stronger positions in key franchise categories. “We’re early on in this work,” he said.
In addition, the company completed a “comprehensive review of the J. Crew business and a multiyear cost-optimization program, to generate savings of $50 million over the next three years with $10 million realized in fiscal 2019.”