The bankruptcy filing allows J. Crew to stay in business while cutting its borrowings. Normally that would include keeping the doors open for its J. Crew and Madewell stores, but sales at those outlets vanished when the coronavirus forced shoppers to stay home and nonessential businesses to shut.

(Bloomberg)—J. Crew Group Inc., No. 47 in the 2020 Digital Commerce 360 Top 1000, filed for bankruptcy, unable to revive flagging sales of its preppy clothing line amid the coronavirus pandemic and crushed by debt rooted in a long-ago leveraged buyout.

The retail chain reached a deal with a majority of its lenders to convert $1.65 billion of debt into equity, J. Crew said in a statement Monday.

Lenders led by Anchorage Capital Group, Blackstone Group Inc.’s GSO Capital Partners and Davidson Kempner Capital Management are providing $400 million of financing to maintain operations during the Chapter 11 restructuring, according to the statement.

The bankruptcy filing in U.S. Bankruptcy Court in Richmond, Virginia, allows J. Crew to stay in business while cutting its borrowings. Normally that would include keeping the doors open for its J. Crew and Madewell stores, but sales at those outlets vanished when the coronavirus forced shoppers to stay home and nonessential businesses to shut.

Even before the virus spread, the company was struggling because shoppers were defecting to online merchants and consumer tastes were changing. J. Crew had been trying to rebound from some fashion misses and complaints of poor-quality clothing.

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“Like many retailers, J.Crew had been facing increasing pressure over the last ten years as it has continued to accrue debt despite seeing success in opening new locations and driving growth for Madewell,” says Kelly Lynch, retail solutions manager at analytics platform vendor ActiveViam. “However, COVID-19 has significantly exacerbated J.Crew’s underlying issues, which has unfortunately made it the first bankruptcy casualty of the pandemic crisis within the legacy retail space.  I suspect that decreased competition in apparel will allow surviving retailers to invest in technology when the crisis levels off.”

J. Crew grew its online sales 2.7% year over year in 2019 compared with the apparel category, which grew 13.1% year over year, according to Digital Commerce 360 data. It ranks No. 16 in the category of 248 apparel retailers, with a 2019 ecommerce penetration of 50.2%, compared with the median 2019 Top 1000 apparel eommerce penetration of 40.5%.

In 2018, J. Crew’s ecommerce penetration was 50.0%; 48.3% in 2017; 43.3% in 2016; and 38.8% in 2015, according to Digital Commerce 360 estimates. Overall for the last five years, J. Crew experienced 7.2% compound annual growth, compared with the category’s 5-year CAGR at 15.1%.

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Asset shuffle

The company managed to sidestep default once before in 2017, with a financial overhaul that included shuffling assets in a way that moved fast-growing Madewell out of reach of creditors.

The change did little to reverse the company’s fortunes, but it irked creditors and turned J. Crew’s name into a synonym on Wall Street for lopsided debt deals that leave lenders with weaker claims on company assets.

J. Crew was relying on an initial public offering of Madewell to raise capital and ease its heavy debt load, a legacy of the 2011 leveraged buyout by current owners TPG Capital LP and Leonard Green & Partners LP. The turmoil in financial markets put an end to that option.

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Madewell will remain part of J. Crew as part of the transaction support agreement the company reached with its lenders, according to the statement. About 71% of the company’s term loan lenders and 78% of its so-called IPCo notes agreed to the deal, the company said.

The company operated 182 J. Crew-branded stores, 140 Madewell stores and 170 factory stores as of March 2, according to recent filings.

The case is Chinos Holdings Inc., 20-32181, U.S. Bankruptcy Court, Eastern District of Virginia (Richmond).

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