- J.Crew is in danger of sinking under a $US1.7 billion debt load.
- The debt was mostly accumulated from a 2011 leveraged buyout, which took it private.
- A similar thing happened with Toys R Us, which couldn’t sustain its debt load and eventually went bankrupt. Toys R Us closed its remaining US stores on June 29.
J.Crew is in danger of falling victim to a curse that has been haunting retail for years.
Though falling sales have plagued the chain for years, its biggest problem doesn’t seem to have anything to do with an inability to keep up with the latest trends.
It’s actually the millions of dollars in debt the retailer has carried since 2011, when TPG Capital and Leonard Green & Partners helped it buy itself through a $US3 billion leveraged buyout, taking the company private.
J.Crew now has around $US1.7 billion in debt, which it is paying in quarterly payments, the Washington Post reported.
“There are so many issues here, but the biggest one is a crippling debt load – we’re talking $US30 million a quarter just in interest payments,” Neil Saunders, managing director of GlobalData Retail, told the Washington Post. “It’s an eye-watering number and it makes a turnaround just about impossible.”
J.Crew has been making progress on at least some of its debt. It was up to more than $US2 billion as of a year ago, but the company successfully negotiated a deal to restructure the most pressing obligation: $US567 million in bonds that would have come due in 2019. The amount due is now cut in half and it has two extra years, until 2021, to boost its sales and pay off the amount.
The long-term debt, however, will continue to haunt the brand as it tries to turn its business around with an ambitious, but still detail-scarce, “relaunch” slated for later this year. A J.Crew spokesperson did not immediately return Business Insider’s request for comment on the relaunch plan.
It’s a familiar story
Toys R Us is a cautionary tale for J.Crew. It, too, was left with a large amount of debt as a result of a leveraged buyout.
Bain Capital, Kohlberg Kravis Roberts, and Vornado Realty Trust together invested $US1.3 billion in a $US6.6 billion leveraged buyout in 2005, taking Toys R Us private.
This saddled Toys R Us with over $US5 billion worth of debt that the company could never shake. According to a bankruptcy filing, Toys R Us was still making $US400 million payments on its debt each year.
“In Toys’ case, high leverage remaining from the 2005 leveraged buyout reduced financial flexibility, which in turn limited investment, leading to the erosion of the company’s competitive position at a time when its primary competitors such as Walmart, Amazon, and Target were running on all cylinders,” said Charlie O’Shea, a Moody’s analyst.
The retail landscape was shifting underneath Toys R Us’ feet, and the combination of increased competition and lack of manoeuvrability helped lead to its ultimate demise and liquidation.
A similar thing happened with Nine West, Payless, True Religion, and Gymboree just in the last few years.
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