Some retail firms burdened with increased financial trouble are opting to close their doors and file forbankruptcy. However, one clothing retailer – J. Crew Group, Inc. – creatively used a private equity restructuring to ease its fiscal problems and breathe new life into the company. Notably, this is not the first time the preppy apparel label used a private equity deal to reshuffle its debt. The first time was to catapult the company’s growth. This new deal, however, buys the business time to reinvent itself and move forward.
Ownership And Equity Changes
First Private Equity Deal – In 1997, a struggling J. Crew divested its noncore operations. It made a deal for
a leveraged buyout by a private equity firm, Texas Pacific, which then owned 85 percent of the remaining
Original IPO – With the help of private equity, sales exploded. By 2006, the company was selling its upscale business casual attire in about 200 stores, online and through its catalogs. They launched a successful IPO, which raised about $376 million for the company and its private equity backers. The IPO reduced Texas Pacific’s ownership stake to 40 percent. Using some of the funds, J. Crew expanded its brand base with the purchase of Madewell.
Private Equity Again – In 2011, J. Crew’s shareholders approved a $2.64 billion leveraged buyout by two private equity groups. By 2014, the firm had more than 450 stores and $2.4 billion in annual sales. Despite the growth of internet sales and sluggish performance by many physical store chains, the retail sector was performing well. Several retailers, including The Container Store Group and Michael Kors Holdings, had successful IPOs in 2013, and another J.Crew IPO was considered. At that time, the company was trying to re-establish its identity and revamp its merchandise in the J.Crew stores, where sales were starting to slide.
The savvy Madewell purchase kept the company’s profit churning.
Financial Situation And Private Equity Deal
Like many retailers, though, J. Crew began to be forced to grapple with the migration of business from brick and mortar sites to online, which now represents about 30 percent of their sales. Company sales dropped 6 percent and 8 percent in 2016 and 2015, as it struggled to update its formerly all-American basics style and increase the presence of its younger skewing Madewell brand.
While those challenges were daunting enough, the biggest issue that led the firm to seek a private equity deal was unsecured bonds coming due in 2019. Before the private equity restructuring last year, the company was carrying over $2 billion in debt. Early in 2017, J.Crew had to issue new debt to cover three interest payments before they took aggressive action. In April of that year, the company closed 39 stores. They also cut 250 front-office jobs, which they expected would create approximately $30 million in annualized pre-tax savings.
In mid-June, their lenders approved restructuring the struggling apparel company’s debt using private equity. The deal allowed J. Crew to slash in half the value of $567 million in unsecured bonds that were coming due in 2019. They did so by transferring the debt, along with the company’s intellectual property (primarily the J. Crew trademark and legally registered name) to a new affiliated company. J. Crew then bought back $150 million of its debt. The new firm issued new notes backed by the brand name and intellectual property, which has an estimated value of $250 million. Additionally, the firm asked the lenders to extend the maturity on the bonds due in 2019 by two years.
The restructuring enabled the company to avoid bankruptcy. Two private equity investment firms, Blackstone Group’s GSO Capital Partners LP and Anchorage Capital Group LLC, procured much of J. Crew’s debt. According to filings, they took on 28 percent of a $1.5 billion term loan as well as 67 percent of the $567
million in bonds.
Current Status and Applicability
Private equity capitalization has been used repeatedly to make J. Crew the global brand name it is today. If the company is successful in jump-starting J.Crew sales (Madewell sales are up 39 percent), other retailers may use similar restructuring and private equity deals to alleviate debt burdens.
The ability to recapitalize is an important strategic tool for businesses in all sectors. Much like homeowners refinancing a home to reduce payments and spread out the debt, private equity transactions like J.Crew’s move to address its near-term debt maturity issue can enable a company to buy time to execute its latest strategic business plan and move in a new direction.
HJR Global specializes in helping distressed companies turn themselves around with creative strategies including private equity recapitalization and other restructuring deals. We are a “non-traditional” firm in the sense that we do not limit our expertise to any one industry. At HJR Global, we have the knowledge and
expertise to help businesses in a variety of fields and situations. Contact us for more information on ways your company can use private equity to survive and thrive.
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