The Madewell store at 115 Fifth Avenue.Madewell Fifth Avenue, New York

Madewell is thinking big. Maybe too big?

The fast-growing, denim-based casual brand, which generated over $600 million in revenues last year, is being valued by the company at close to $3 billion, according to the parent J. Crew Group’s proposal for a Madewell initial public offering.

Madewell seeks to generate $970 million in proceeds from the IPO, representing 40 percent of its equity. That values Madewell at $2.45 billion in equity, or 20 times its earnings before interest, taxes, depreciation and appreciation of $113 million last year.

The company has also proposed issuing $500 million in new secured debt, bringing Madewell’s total enterprise value to $2.925 billion.

“It’s definitely a steep valuation,” said one market source close to the company. “It’s a very high number. The market will bring it down.”

“It’s way overvalued, particularly in this retail environment,” said one financial source. “Ten to 15 times EBITDA would be realistic — not 20 times.”

J. Crew Group wants to use the proceeds of the IPO to pay down $1.7 billion in long-term debt.

J. Crew Group’s Madewell IPO proposal, indicated in its Securities and Exchange registration statement filed last Friday, was made to an ad hoc group of creditors. No agreement has been reached among the parties and no further discussions are scheduled with the ad hoc group at this time, according to the document.

The lenders did come back with a counter proposal.

“The counter proposal is similar to the company proposal except lenders want around 30 percent of equity and had a limit that if the IPO valuation wasn’t high enough, the company couldn’t go to market. Lenders are worrying about get high enough valuation to pay off the term loan,” said a creditor close to the negotiations. J. Crew Group has a $1.372 billion term loan due in 2021 and a $364 million asset-based loan.

“Our view is that Madewell is worth roughly $1.7 billion to $1.9 billion, which is in line with where Aritzia trades,” the creditor said, adding that his firm is projecting $170 million in EBITDA at Madewell in 2020.

There’s speculation that J. Crew Group made its IPO proposal to attract a buyer for the business, rather than having Madewell go public. “In my view, they put this proposal out there to see if a strategic buyer or third party will come in and buy this asset,” said the creditor.

The earliest Madewell could go public is around the end of this year. The company will receive comments on its IPO proposal in the near future from the SEC.

Skepticism of Madewell’s potential valuation comes in the wake of WeWork’s decision to postpone its initial public offering. Investors raised questions over how much WeWork is worth. There have also been concerns about its management. WeWork, which earlier this year changed its name to The We Co., was initially valued at $47 billion. It’s currently expected to be valued at well under $20 billion.

But Madewell is different.

The business was founded by the legendary Millard “Mickey” Drexler, the former chairman and chief executive officer of J. Crew Group and former ceo of Gap Inc. It’s been successfully managed by Libby Wadle, president and ceo, who worked with Drexler and is set to continue running the multichannel brand in the event Madewell splits from the parent J. Crew Group.

The company has said the IPO of Madewell is 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.”

In the company proposal, a few potential valuations — in the $2.5 billion to $2.8 billion range — were indicated for “illustrative purposes only and such values are not the result of, and do not represent, actual valuations, estimates, forecasts or projections of J. Crew or any third party and should not be relied upon as such,” according to the SEC document. “In the event any transaction occurs in the future, the terms of any such transaction may be materially different than the terms set forth in the confidential Information. However, no assurance can be given that any such transaction will occur at all.”

Denim has been the key driver in Madewell’s surge and is considered a “core competency” for the 12-year-old division of the J. Crew Group.

Officials like to say that the brand has created a community of loyal women and men who are Madewell shoppers. To further connect with customers, Madewell’s Hometown Heroes program enables the brand to enter markets in a different way and to feature handmade, small-batch goods made by local creatives, makers and artisans sold online, in stores and in pop-ups. Last year, Madewell hosted around 2,000 of these events, which include panel discussions.

Madewell also created the Blue Jeans Go Green program, which recycles denim into home insulation products used by organizations such as Habitat for Humanity.

Last week, J. Crew Group reported that its loss for the second quarter grew to $44.2 million. Transactions, transformation and severance costs and a benefit related to the termination of the lease on its former headquarters at 770 Broadway to the new one at 225 Liberty Street impacted the bottom line.

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.

While J. Crew for several seasons has been grappling with product issues and losing popularity, Madewell continues to open stores and resonate with consumers. And as the SEC filing reveals, Madewell’s performance has been very strong, generating $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. Thirty-seven percent of its revenues are digital. The brand achieved positive comparable sales in 41 of the last 42 quarters.

A Madewell spin-off would put a brighter light on the brand’s performance. But the spin-off also means Madewell might lose some of the resources and scale of J. Crew. It may have to purchase certain assets, could experience difficulties operating for the first time as a stand-alone company, and would be truly competing against J. Crew.

For business news from WWD, see: 

J. Crew Group Widens Loss; Files SEC Doc for Madewell IPO

J. Crew’s Big Madewell Maybe

Madewell’s Libby Wadle on Denim, Product Discovery and Community Building

WATCH: What Makes a Fashion Brand Successful? 

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