J.Crew, long the go-to brand for yuppies seeking chinos and pullovers, has fallen on hard times, but it hasn’t quite thrown in the towel. Despite recording an inventory charge of $39.3 million during 2018’s fourth quarter, the retailer is reportedly pulling out all the stops for a turnaround, instead of waving the bankruptcy white flag like so many other retailers.
“J.Crew’s struggle to avoid bankruptcy indicates the view of retail in general that bankruptcy is a death knell as exemplified by the fact that in the current environment most retailers do not survive bankruptcy,” said Janice B. Grubin, bankruptcy attorney with LeClairRyan law firm in New York.
Much as Toys “R” Us tried to change its overall approach and cut back product lines before eventually filing for bankruptcy, J.Crew announced this month that it is considering spinning off its Madewell brand, which posted a 16% increase in sales to $157.9 million during the fourth quarter of 2018.
“The decision to review strategic alternatives reflects our continued focus on maximizing the value of our Company and our conviction in Madewell’s long-term growth potential, which we believe will further enhance our financial flexibility to support a turnaround at J.Crew,” said Chairman Chad Leat in a statement.
Turnaround strategies are a way of life for some retailers, especially as consumers move more and more of their shopping to Amazon and other online retailers.
Barnes and Noble, for example, has no permanent CEO after terminating Demos Parneros and has been in a turnaround for years, reporting a consolidated first-quarter net loss of $17 million, compared with a $10.8 million loss a year earlier, while women’s fashion store Charlotte Russe failed in its restructuring and is undergoing chapter 11 liquidation in federal bankruptcy court in Delaware.
“The perception is that bankruptcy must be avoided at all costs to preserve any value the retailer might have,” Ms. Grubin told PacerMonitor.
However, not all retail bankruptcies are failures.
After Diesel USA filed chapter 11 on March 5 to implement a three-year reorganization plan with new management, the retailer obtained approval of its disclosure statement and confirmation of its bankruptcy plan on April 12, less than six weeks after its filing.
“Diesel’s path may provide a practical blueprint for the successful use of a bankruptcy in a company’s restructuring,” Ms. Grubin said.
Most recently, J.Crew turned to attorneys who specialize in restructuring to explore options for reworking its $1.7 billion debt. But liability restructuring alone is unlikely to save the retailer.
“J.Crew cannot solve their operational problems solely by creating liquidity,” said William L. Norton III, a Nashville, Tenn.-based partner and member of the Bankruptcy and Creditors’ Rights Practice Group with Bradley Arant Boult Cummings. “They’ve got to focus on generating more market share and reversing the trend of customers shopping elsewhere.”
Because former CEO Jim Brett thought the J.Crew brand was missing lower-priced products that allowed new customers an entry point to discover the clothing line, he launched a rebranding in September 2018 and for the first time in nearly four years, J.Crew saw an increase in sales. However, by November 2018, Mr. Brett had stepped down.
“It could have been a panic move by the board to terminate Jim Brett, but sometimes you need greater patience and hope that a new CEO’s decisions will develop greater sales in the long run,” Mr. Norton told PacerMonitor. “The problem is retailers are short on time to develop a new strategy, and if it doesn’t bear fruit, they may not have sufficient liquidity to regroup and try again.”
At the root of that liquidity often lies a superfluous commercial real estate portfolio because retailers typically house their inventory in multiple storefronts in various locations nationwide. For example, Victoria’s Secret will likely create cash flow by shuttering more stores after disclosing in February a drop in net income to $643.9 million in 2018 from $983.0 million in 2017.
“Even if a business like J.Crew isn’t doing well, certain locations are not profitable and they seek to close these under performing stores, they’re still obligated to pay rent through the end of the respective terms, which could run for several more years,” said Aleida Martinez-Molina, an attorney who leads the bankruptcy and insolvency practice at Weiss Serota Helfman Cole & Bierman.
If J.Crew were to file, Section 365 of the U.S. Bankruptcy Code permits debtors to choose between assuming, assigning or rejecting leases.
“J.Crew storefront locations are not an asset,” Mr. Norton said. “They’re a liability. They lease the stores and if the store is not profitable, their only ability to get out of these leases other than through bankruptcy is either find a tenant to sublease it from them and/or reach an agreement with the landlord, which is often hard to do.”
However, Sears Roebuck & Co. learned the hard way that a turnaround strategy, which includes closing retail stores, is no surefire way to sidestep bankruptcy court. Despite spending $10 billion in a turnaround since 2012 that closed 700 bricks-and-mortar stores, Sears landed in New York Southern Bankruptcy Court on Oct. 15.
According to Jim Van Horn, an executive board member of the Turnaround Management Association’s global executive board of trustees and bankruptcy attorney at Barnes & Thornburg, all retailers seeking to survive need to pivot as quickly as possible to respond to changing consumer buying trends.