The clothing retailer continues to have trouble selling the clothes consumers want to buy at full price. Now he is facing a slowing economy.
When J.Crew Group came out of bankruptcy in 2020, the long-suffering company perhaps had reason to hope.
The clothing chain had successfully converted $1.6 billion of debt into equity. Investors led by the Anchorage Capital Management hedge fund lent him a $400 million line of credit. And as the pandemic abated last year, consumers quickly returned to stores and spent money, giving J. Crew and other clothing retailers a nice boost in sales.
Unfortunately, the good times didn’t last long. The post-covid sales surge has largely dissipated. This year, analysts expect consumers to cut spending on clothing and footwear in the face of higher prices and a slowing economy. And J. Crew, which has long struggled to keep up with its more cutting-edge competitors, once again looks very vulnerable.
Last week, the credit rating agency Standard & Poor’s cut your perspective at Chinos Intermediate 2 LLC, the parent company of J. Crew, to “negative” from “stable.”
The firm noted that J. Crew’s operating margins and free cash flow declined in the third quarter due to a “tougher promotional environment.” That means J. Crew had to offer deep sales and discounts to move its inventory of unsold clothing.
“We expect these headwinds to persist due to challenging macroeconomic conditions, including a shallow recession expected in 2023,” the report said. “In addition, we expect comparable sales trends to soften in 2023 as consumers become more selective with discretionary spending, in contrast to growth trends after the economy reopened from the pandemic.”
To be fair, other clothing retailers are struggling. Last July, S&P lowered its outlook on Gap Inc. (GPS) – Get a free reportto negative due to economic challenges and “execution missteps” with its Old Navy brand.
“Gap failed to maintain its good operating momentum from 2021 as high inflation hampered consumer demand and the company struggled to manage inventory effectively due in part to a move away from casual wear,” S&P said.
express inc. (EXPR) – Get a free reportwhich reports fourth-quarter earnings on Friday, said comparable sales for July through September fell a whopping 8%.
Bottom line: US specialty clothing chains continue to mismanage their inventory, pricing, and merchandising. And consumers will only get more demanding this year.
However, J. Crew is more vulnerable, given its small size and lack of financial resources. Yes, the company eliminated its debt through bankruptcy and received $400 million from investors.
But no amount of financial wizardry can solve the company’s fundamental problem: selling clothes that consumers want to buy at full price.
