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J.Crew gets green light to spin-off Madewell

J.Crew Group is proceeding with its plan to spin-off its fast-growing denim brand as a public company.

The apparel retailer said that it reached an agreement with its lenders that will enable it to separate J.Crew and Madewell into two independent companies and pursue a proposed IPO of the brand.  (In April, J.Crew said it was examining strategic alternatives, including an IPO, for Madewell. The offering was conditional on reaching the agreement with the lenders.)  The company has until March 18 to take Madewell public. If it doesn’t meet the deadline, the transaction support agreement will be terminated.

Launched in 2006, Madewell has emerged as the crown jewel in J.Crew, whose namesake brand has been struggling to rebound for some time. In the company’s third quarter, ended Nov.2, Madewell sales increased 13% to $151.6 million and same-store sales rose 10%. J. Crew sales decreased 4% to $415.8 million and same-store sales were flat. 

The Madewell IPO is targeted to help reducing J.Crew’s debt load, which it put at some $1.7 billion, and help the core brand with its turnaround while capitalizing on the soaring popularity of the denim brand.  On the company’s quarterly earnings call with analysts on Monday, the company said it expects the deal to recapitalize its balance sheet.

“J.Crew will benefit from a deleveraged balance sheet that will facilitate our commitment to return J.Crew to profitable growth over time,” said Michael J. Nicholson, president, chief operating officer and interim CEO,  J. Crew Group.

For the third quarter, J.Crew reported a new loss of $19.9 million, compared to $5.7 million in the year-ago period. The current loss partly stemmed from the transaction costs and non-cash impairment charges. Total revenues edged up 1% to $625.6 million. Total comparable sales increased 3%.

“Our third-quarter results reflect adjusted EBITDA growth of nearly 50 percent, marking our strongest third-quarter performance in the last five years,” stated Nicholson. “These results reflect encouraging momentum at the J. Crew brand fueled by strong gross margin performance, continued growth at Madewell and the early benefits of our multiyear cost optimization program announced in September.”

As of December 2, 2019, J. Crew operates 191 namesake stores, 138 Madewell stores and 172 factory (outlet) stores.

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