Is J.Crew looking to spin off or sell Madewell?
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Business
London - Things have not been going particularly well for U.S fashion company J. Crew Group Inc lately. It's core brand J.Crew continues to struggle with declining sales and debut burden, and earlier this month it folded its once highly successful and affordable bridalwear business. However, on the other hand its Madewell brand continues to thrive, leading to speculation that the Group is set to separate it from the company.
J.Crew Group Inc is said to be working with investment bank Lazard to assess multiple strategic and balance sheet options, which includes the potential separation of Madewell from its parent company, reported Reuters. This move could see the group either spinning the brand out on its own or selling it off, according to sources familiar with the matter. While the potential sale of Madewell would see the company's private equity owners monetize its value, it could also infuriate its lenders as the move would see J.Crew lose one of it fastest growing divisions.
Could Madewell be headed for a future sale ?
Relaunched in 2006 by J.Crew Group Inc, Madewell has grown to become the "cool-girl" sister label to J.Crew, offering trendy and hip designs. It's brand model is similar to that of Gap's Old Navy, which sees Madewell offering lower priced items of a similar quality to that of J.Crew - a move which may have have lured customers away from the Group's core brand. Sales for Madewell grew 23 percent in 2015 to 301 million dollars, with comparable sales increasing 8 percent. In the same year however, J.Crew's comparable sales dropped 5 percent.
Despite what the future may hold for Madewell, J.Crew Group Inc is still limited in its decision for its trendy fashion label outside of the company, as any deal would be dependent on a provision included in its agreement with lenders. This provision, which aims to protect the lenders' collateral, would prevent J.Crew Group Inc from selling Madewell if its total debt in comparison with the profits from the sale would be more than a fixed maximum.
According to the Group's third quarter results, the company debt now stands at 1.5 billion dollars, down from 2 billion dollars. J.Crew sales decreased 7 percent to 488 million dollars and comparable sales decreased 9 percent following a 12 percent decline in the third quarter last year. "If J Crew is a problem child, its sister brand, Madewell, is the star of the show," commented Neil Saunders, CEO of Conlumino. "Its more carefully defined image and its appeal to trendy younger shoppers continues to drive growth."
"That the brands are in very different positions has led to speculation that Madewell could be spun off. In our view this would make sense if investors wanted to extract maximum value – however, it would also mean that the debt laden J Crew segment would be in a much weaker position if the company could not change the trajectory of performance. That debt, now standing at 1.5 billion dollars, is a major cause for concern. We believe it acts as a millstone around the company’s neck and encourages it to take short term steps to generate cash flow, rather than long term corrective action."
Both J.Crew Group Inc and TPG Capital LP and Leonard Green & Partners L.P., which acquired J.Crew in 2011 for 2.8 billion dollars, taking the company private, declined to respond to the Reuters report. Speculation concerning Madewell's future comes as talks of J.Crew going public have dissipated, as the Group continues to struggle. Both Lazard and TPG declined comment on the report.
Photos: Madewell, Facebook