J.Crew, mired in debt, is trying to turn around its business

For years, the majority of Ann Shumbo's clothing came from J.Crew. The Los Angeles-based realtor bought t-shirts there monthly, as well as pants, sweaters and blazers.

Not anymore. A series of misfires, she says, have kept the 50 year-old away from the company for over a year. Like other longtime loyalists, she's found a number of other alternatives, including Banana Republic, Zara, Saks Fifth Avenue and Neiman Marcus, that have taken the place of her once-favorite brand.

"J.Crew used to be a staple, but it's like they've been in a design slump for years," Shumbo said. "The quality is inconsistent, the design is funky and nothing fits like it should."

Now J.Crew is attempting a redesign. This year it has introduced a series of new products - intimates, skimpier swimwear, vintage clothing - to lure back customers. Executives have also said they will begin slashing prices, going against mainstream retailers like Macy's, which say never-ending promotions have backfired by eating into profit margins. Earlier this week, J. Crew announced it had hired a new chief design officer, Johanna Uurasjarvi, who previously oversaw design at home furnishings chain West Elm.

But J.Crew's problems have been around longer than some fashion trends. Sales have been tumbling for more than three years, amid changing consumer habits and increased competition. It is in the process of closing 70 stores, after which about 250 will remain. Add to that nearly $2 billion in debt, much of it from a 2011 leveraged buyout, and analysts say the company's problems cast a shadow on recent turnaround efforts.

"There are so many issues here, but the biggest one is a crippling debt load - we're taking $30 million a quarter just in interest payments," said Neil Saunders, managing director of GlobalData Retail. "It's an eye-watering number and it makes a turn-around just about impossible."

The company's recent efforts, he added, are "a case of rearranging deck chairs on the Titanic."

A number of executives have left in the past year, including longtime chief executive Mickey Drexler. (He has been replaced by Jim Brett, also formerly of West Elm.)

"J.Crew is doing everything it can to head in the right direction - the question just remains whether it can manage its crippling debt load," said Liz Dunn, chief executive of retail analytics firm Pro4ma.

Although the company's spin off, Madewell, has fared better - sales were up 39 percent in the most recent quarter, compared to a 7 percent drop at J. Crew - the retailer's parent company continues to post steep losses. In 2017 it reported a loss of $125 million on revenue of $2.37 billion, compared to a $24 million loss on revenue of $2.43 billion a year earlier.

Overall, the company has about $1.7 billion in long-term debt, the bulk of it from a 2011 leveraged buyout by private-equity firms TPG Capital and Leonard Green & Partners.

Dozens of private-equity backed retailers - including Toys R Us, Nine West and Gymboree - have filed for bankruptcy since last year, as they struggle to keep up with large debt payments and increased competition from online start-ups. Mid-tier brands have been particularly hard hit, analysts say, as clothing companies like Gap, Ann Taylor and Chico's struggle to set themselves apart from a growing number of retailers hawking cardigans, chinos and statement necklaces. Another issue: Consumers are spending less on clothing than they once did, as they allot more of their budgets to beauty products and travel.

"You can go to any number of stores and find ballet flats that are cheaper, more comfortable and just as cute as at J.Crew," said Sucharita Kodali, a retail analyst for market research firm Forrester. "Nothing at J.Crew stands out."

The decision to hire a home furnishings designer wasn't an obvious choice, but an outside perspective may be what it takes to shake things up, analysts said. West Elm has been lauded as a retail success story in recent years, with double-digit sales growth at its stores and a rapidly-growing website that now accounts for more than half of the company's sales. Last year, the company had $1.11 billion in revenue, marking a 10 percent increase from the year before.

"West Elm has been a shining star," said Stacey Widlitz, president of SW Retail Advisors. "[Uurasjarvi] has obviously built a very relatable brand with prices that resonate with the modern, younger consumer - and that's exactly what J.Crew is trying to achieve, too."

Widlitz added that lower prices - even if they mean with lower quality - may also help J.Crew attract new customers that have become accustomed to the trendy, affordable wares sold by fast-fashion competitors like H&M and Zara. And although the company's profit margins may shrink as a result, the added volume may help turn things around for the retailer which has also been taking steps to restructure its debt load.

"At the moment, J.Crew is probably safe from bankruptcy," said Saunders of GlobalData Retail. "But it is certainly high-risk unless it can get its debt under control."