Analysis: To survive, J. Crew brand needs to be reinvented

Although J Crew has been making progress in reducing its losses, the company still ended its last fiscal year $78.8 million in the red. The primary source of this financial woe is the $1.7 billion of long-term debt that sits on the company’s balance sheet like a millstone around its neck. Quite simply this is crippling the business which, at operating level, is profitable.
 
The decision to enter Chapter 11 with the intention of deleveraging the balance sheet is prudent and, arguably, something that should have been done years ago. However, the coronavirus crisis has forced the situation to a head. It has also given J Crew some justification to ask lenders to make the unpalatable choice of having their debt converted into equity. In the current trading environment, the alternative would have been default, putting J Crew on the path to liquidation.
 
Although getting rid of the debt gives the firm some much needed breathing space, it is not the only issue to contend with. The J Crew brand still isn't resonating with consumers — especially across the full price part of the business. J Crew's products are not terrible in either quality or design. However, the ranges are samey and lack the embellishments and twists of more contemporary brands that would allow them to stand out. The consequence of this is that a growing number of shoppers see J Crew as both boring and bad value for money and refuse to pay full price for garments.
 
Outside of J Crew, Madewell is having a better time with sales up strongly, driven by a growing loyal base of shoppers. While the brand is smaller than J Crew it is an important driver of the company’s overall value. As such, it is not surprising that it will now remain a part of the group and not be spun off via an IPO.
 
Before Chapter 11, J Crew was on a slow march to ruin. This process gives the company a chance to survive. However, that survival is not just dependent on reduced debt; it requires a reinvention of the J Crew brand. Given the apparel market will be highly subdued, extremely promotional, and intensely competitive as the coronavirus crisis abates, reinvigoration of the ailing label will be an order of the tallest magnitude.