J Crew Group says it is actively exploring strategic alternatives to maximise the value of the company, including a potential initial public offering (IPO) of its Madewell business, which, if pursued, could be completed as early as the second half of 2019.
In its recent fourth-quarter earnings release, J Crew said it has taken “immediate and decisive action” to refocus its strategy and improve performance in 2019, with the goal of returning J Crew to profitability and sustaining momentum at Madewell. J Crew sales slipped 4% to $527.9m in the period, while Madewell sales surged 16% to $157.9m.
Now the group says it is in talks with its legal and financial advisors and is considering an IPO of Madewell as part of its bid to maximise value, position both the J Crew and Madewell brands for long-term growth, and deleverage and strengthen the company’s balance sheet.
Separately, J Crew has announced a series of leadership and governance changes, including the appointment of Michael Nicholson, president and COO, as interim CEO of J Crew Group, effective immediately.
The company says the decision to review strategic alternatives “reflects our continued focus on maximising 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,” says Chad Leat, chairman of the board of directors. “The board is confident in Mike’s ability to lead the company in this dynamic retail environment during this transition period. His appointment reflects the key role he has played leading the company and directing strategies positioned to improve performance and maximise value.”
Nicholson adds: “I look forward to working with the board of directors and our team to build on the decisive actions we have taken to date to refocus our strategy and improve performance in 2019 with the goal of returning J Crew to profitability.
“We believe a potential IPO of Madewell, which had another record year of performance in 2018, could unlock significant value and generate meaningful proceeds that would strengthen our balance sheet and increase our overall financial flexibility to address our 2021 debt maturities, giving us an improved platform to support J Crew’s turnaround and allowing Madewell to achieve its full potential over the long-term.”
Nicholson joined J Crew in 2016 as president, COO and CFO.
In addition, Jack Weingart, co-managing partner of TPG Capital, has been appointed to the company’s board, replacing Carrie Wheeler, who will be leaving the board after eight years with the company.
Meanwhile, Nicholson’s appointment replaces the office of the CEO, previously comprised of four executives, which has led the company since November 2018. Libby Wadle will continue as president and CEO of Madewell, and Lynda Markoe will continue as the chief administrative officer of the company. Both Nicholson and Wadle will report to the board.
Separately, Adam Brotman, president and chief experience officer, has decided to resign from his position for personal reasons.
Raya Sokolyanska, vice president at Moody’s Investors Service, notes with debt maturities on the horizon in 2021 and very high leverage, J Crew faces an “elevated risk” of a second financial restructuring after its 2017 debt exchange. “If executed, a Madewell IPO could improve the capital structure and better position the company to address its debt,” she says.
“While Madewell still generates less than a quarter of the company’s revenues, its record of comparable sales growth during the past several years while the J Crew brand suffered declines points to likely meaningful contribution to the overall company’s enterprise value.”