J.Crew Floats Potential Madewell IPO

NEW YORK, United States —Madewell has been among the few bright spots at J.Crew in recent years. Now, the struggling retailer is considering a spinoff of the fast-growing sub-brand as a way to pay down debt and fund a turnaround.

In a statement Thursday, J.Crew Group said it was initiating a “review of strategic alternatives,” including a possible initial public offering for denim-heavy Madewell. The company also named Michael J. Nicholson, its current president and chief operating officer, as interim chief executive officer.

Nicholson was one of four executives who have stewarded the challenged retailer since Jim Brett stepped down as chief executive in November. Former Ralph Lauren chief executive Stefan Larsson was a leading candidate for the top job, but multiple sources familiar with the negotiations said in March that he declined because there weren't enough resources to support a turnaround given the company's debt load. In 2017, the company negotiated with creditors to push back the maturity of $566.5 million in debt from 2019 to 2021.

Brett had initiated sweeping changes at J.Crew, including launching new brands and broadening the main brand’s style beyond its preppy roots. However, those measures failed to produce a significant sales bump, while a reliance on deep discounts ate away at profit margins.

In the most recent quarter, the group posted disappointing results as profit margins decreased. At the core J.Crew brand, comparable sales fell 6 percent. However, Madewell's comparable sales rose 22 percent. Total revenue increased 3 percent to $733.8 million, with the sub-brand driving about a fifth of the group's overall sales.

In Thursday's announcement, the company said it is "considering an IPO of Madewell as part of its previously stated initiatives to maximise value, position both the J.Crew and Madewell brands for long term growth, and deleverage and strengthen the company's balance sheet." It said the IPO could come as early as the second half of 2019.

Madewell’s momentum over the past five years has defied industry trends, as other mall retailers struggle to keep customers. Known for its separates and reasonably priced denim, which generates a third of its sales, the brand wasn’t burdened by J.Crew’s frequent discounting or sprawling store network. It added a men’s line in September and plans to open 10 new stores and expand its global wholesale partnerships this year.

Madewell's growth is decelerating: total sales increased 16 percent in the company's fourth quarter, the lowest rate in seven quarters. However, investor appetite for denim is hot right now, on the heels of Levi Strauss & Co.'s successful debut on the New York Exchange last month. VF Corp., the parent of Vans and The North Face, announced last year that it's also planning a spinoff of denim brands Lee and Wrangler. The market for jeans has seen tremendous growth in recent years, totaling over $100 billion in retail value last year, according to Euromonitor.

In a statement, Nicholson said that the potential IPO of Madewell could “strengthen our balance sheet and increase our overall financial flexibility to address our 2021 debt maturities.”

Madewell has been led by Libby Wadle since 2017; she joined J.Crew in 2004 and was part of the group that launched the sub-brand under former chairman and former chief executive Millard "Mickey" Drexler in 2006. Drexler stepped down as CEO in 2017 and resigned from the board in January.

Nicholson was previously the president, chief operating officer and chief financial officer of J.Crew. He joined the company from Ann Inc., the parent company of Ann Taylor and Lou & Grey.

Thursday’s announcement is a sign that a chapter that began after Brett joined J.Crew in July 2017 is drawing to a close. As part of his turnaround plan, Brett lowered prices, launched new brands and negotiated with creditors. Most notably, he overhauled former creative director Jenna Lyons’ vision for J.Crew — preppy attire with a youthful edge — and instead positioned the label to be stylistically broader. Analysts say this move, coupled with changes in fabric supply as well as a bare bones loyalty programme, diluted J.Crew’s brand.

“If you look at the traditional retail model of ‘good, better, best,’ J.Crew was better and then had this price point of really almost luxury,” Brett told BoF in an August 2018 interview. “Some of the Collection things were literally Gucci prices.”

The New York-based brand emerged in the 1980s and 90s as an all-American brand with New England flare. In the 2000s, under Drexler and Lyons, the brand became a phenomenon with their stylish, sequinned take on pencil skirts and oxford shirts. In 2014, annual sales reached $2.6 billion.

But consumers’ infatuation with J.Crew faded in recent years as mall traffic declined, consumers got hooked on promotions and fast fashion retailers took over market share. The brand has seen quarter after quarter of declining sales since 2014, the last time it posted growth.

J.Crew also announced Thursday that chief experience officer Adam Brotman, who Brett hired from Starbucks a year ago, is resigning. Also exiting is longtime board member Carrie Wheeler, who will be replaced by TPG Capital's Jack Weingart. Private equity firms TPG Capital and Leonard Green & Partners took J.Crew Group private in a leveraged buyout in 2011.

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