J. Crew just got a sign that its turnaround plan might be doomed

J. Crew

J. Crew is in the middle of a turnaround, but investors should still be concerned about the future.

The brand’s indirect parent company Chinos Intermediate Holdings has a “negative outlook” for the future, according to Moody’s Investors Service. Analysts had previously rated Chinos as having a “stable” outlook.

“The negative outlook reflects the persistent declines in J. Crew’s operating performance due to weak execution and challenging industry environment,” Moody’s analysts said in the report.

J. Crew’s sales are still slumping.

The once popular apparel company announced in August that sales at stores open at least a year were down a startling 13% from the same quarter last year.

The retailer’s sales have been steadily declining for more than a year.

“While the second quarter is certainly not where we’d like it to be, our performance was in line with our expectations,” CEO Mickey Drexler said on a recent earnings call. “We’d anticipated the second quarter to be challenging as we work through spring and summer inventory.”

Earlier this year, the company attributed its woes to fashion misses such as an ill-fitting sweater.

The retailer has also been accused of alienating its core customers. Clothes have been called gaudy and overpriced, and many items are on sale.

Getting J. Crew shoppers to pay full price, an achievement Moody’s says is essential for the company’s future success, could be challenging.

Elizabeth Holmes of The Wall Street Journal suggested that “a steady drumbeat of sales, with discounts of as much as 40%, has trained some shoppers to balk at paying full price.”

J Crew
J. Crew has been consistently having sales — what Moody’s calls a ‘promotional environment.’ Hollis Johnson/Business Insider

J. Crew needs to act quickly.

“Our view is that things continue to decline, there could be downward pressure on the rating,” Moody’s analyst Mike Zuccaro said to Business Insider. He said that if J. Crew’s efforts to turn around business do not come into effect in the next 12-18 months, there could be more pressure on the business.

Drexler highlighted that changes would be en route on a recent earnings call.

“With that, there’s a track record of the design team and the management team as a fashion retailer — they will have fashion misses, and J. Crew has [had] fashion misses in the past, and they have recovered nicely in the past,” Zuccaro said. “This particular miss is rather prolonged.”

It’s not the end yet, though. “We view their liquidity as good, so they do have cash,” Zuccaro clarified.

However, big changes are “going to take time. These things take time.”

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