U.S. apparel company J. Crew Group has started to separate its thriving Madewell brand from the parent group, people familiar with the matter said this week. Battling sliding sales at its core J. Crew brand and a weighty debt burden, the company is working with investment bank Lazard Ltd to assess multiple strategic and balance sheet options, according to sources.
The separation of Madewell, which has won over shoppers with its laid-back, artsy clothes, may lead to a sale or spinoff. However, the sources cautioned that no decision has been made.
J. Crew could be limited in how it ultimately proceeds with Madewell because of a provision in its agreement with lenders. The provision, meant to protect the lenders' collateral, prohibits J. Crew from selling Madewell if its total debt compared with a measure of profit exceeds a certain ceiling. J. Crew, including Madewell, had roughly $2 billion in debt as of July 30 and just $49.2 million in cash.
Separating the two brands would allow the company's private equity owners to gain value, but could anger creditors by stripping the flagship brand of its fast-growing segment, one source said.
J. Crew, once known for its relatively affordable all-American style, has struggled to retain its core following after going through several brand reinventions. By comparison, Madewell, which J. Crew launched in 2006, has consistently appealed to young shoppers by marketing itself as a modern-day interpretation of classic American denim.
Madewell is significantly smaller than J. Crew; its sales totaled $301 million in the last fiscal year, while J. Crew's were $2.1 billion. As of August this year, there were 287 J. Crew retail stores and 108 Madewell stores.
J. Crew is currently reshuffling its collections in an effort to turn around its business. To take advantage of the "athleisure" movement, the retailer teamed up with New Balance to launch its first activewear collection this fall. It will also shutter its bridal collection.
(Reporting by Lauren Hirsch and Jessica DiNapoli in New York; Editing by Matthew Lewis)