The J. Crew Group seems to be in a hurry to launch a Madewell initial public offering.
Management held conversations with lenders over the past week and suggested that a proposal on a Madewell stand-alone business plan and for de-leveraging the J. Crew Group could be presented to them soon.
“They’re talking about weeks, not months. I was surprised they said that,” said one financial source. “There’s a very quick timeline.”
There’s been speculation that lenders may reach out to PJT Partners Inc., an advisory-focused investment bank, spun off by The Blackstone Group in 2015. PJT represented term loan lenders in J. Crew Group’s last restructuring. The retailer needs to get the consent of lenders for any IPO of Madewell.
The source said J. Crew Group is contemplating creating two separate businesses, J. Crew and Madewell.
A Madewell IPO could satisfy debt holders, give a new lease on life to the troubled J. Crew brand, and eventually pay a return to the company’s private equity backers, TPG Capital and Leonard Green & Partners.
J. Crew Group has $1.7 billion in debt, the biggest portion of which comes from the company’s $1.4 billion term loan due in 2021.
With the term loan coming due in 2021, “They need to convince lenders that now is the time to IPO,” the source said.
There’s also been speculation that the company could IPO 50 percent of Madewell, but that depends on market conditions, and a different source close to the company said there’s no determination on that yet.
Meanwhile, the financial source said lenders would expect a substantial pay down of the term loan, possibly between $500 million to $600 million, or a little more than a third of the loan.
In addition, the source said Madewell is going to pro forma have some debt. Madewell could have a market value of around $1.5 billion, with an equity value of about $1.15 billion, taking into account some debt, according to the source. “With about $575 million in stock that would get a lot of people interested.”
Another source said J. Crew Group was valuing Madewell at closer to $2 billion, but might have lowered its expectations.
The financial source said conversations with lenders and J. Crew Group’s Mike Nicholson, interim chief executive officer, and Vincent Zanna, chief financial officer and treasurer, were held over the past week or so.
The business plan would include a Madewell capital structure and a proposed separate board that would include board members from the J. Crew Group, which would still maintain ownership in Madewell after the IPO. Board members would be determined at a later date.
J. Crew Group, in revealing a possible IPO for Madewell earlier this month, said the IPO could be completed as early as the second half of this year. The company said it was considering an IPO of Madewell as part of its previously stated initiatives to “maximize value, position both the J. Crew and Madewell brands for long-term growth and deleverage and strengthen the company’s balance sheet.”
Madewell has been led by Libby Wadle since 2017. She’s been president since then and this month added the title of chief executive officer of Madewell, signaling confidence in her management.
Madewell, which operates 131 stores and a web site, last year had $529.2 million in sales, with comparable sales rising 25 percent. The business was founded by Millard “Mickey” Drexler, the former chairman and ceo of J. Crew Group and former ceo of Gap Inc.
While the J. Crew division continues to flounder, Madewell has been showing steady growth, resonating with consumers with its denim-based casual collection.
For 2018 overall, J. Crew Group had a net loss of $120.1 million, compared to a net loss of $123.2 million in 2017. Adjusted earnings before interest, taxes, depreciation and amortization were $112.8 million, compared to $225.9 million in the year prior.
Total revenues increased 5 percent to $2.48 billion; comparable sales increased 6 percent. J. Crew sales decreased 4 percent to $1.78 billion; comparable sales increased 2 percent.
The decision by the group to consider a Madewell IPO reflects a trend in the industry to separate successful retail assets from those that are lagging to provide more value to shareholders and shine a brighter light on what’s working.
In February, Gap Inc. revealed plans to spin-off Old Navy into a separate public company, while the Gap, Athleta, Banana Republic, Intermix and Hill City divisions will comprise another separate public company. Old Navy has been a cash cow for Gap Inc., Athleta has been on a growth path, but Gap and Banana Republic have been troubled for many years. Drexler also founded Old Navy. Unlike J. Crew Group, which has heavy debt, Gap Inc. has a healthy balance sheet.
In another example, the VF Corp. has begun the process of spinning off its jeans business, which includes Wrangler, Lee and Rock & Republic, and its outlet business into a separate entity called Kontoor.