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Madewell IPO? J.Crew Mulls Solutions for Crushing Debt

April 11, 2019, 9:39 PM UTC

J.Crew Group’s board seems to have finally yielded to reality’s call.

The debt-laden apparel retailer said Thursday that it was considering a number of “strategic alternatives,” which typically include selling all or part of the company, as well as spinning off its wildly successful Madewell denim brand into a company listed separately on the stock exchange.

The move comes just three weeks after J.Crew Group reported fourth quarter results and admitted that “new strategies we deployed were ultimately not successful” for shoring up its namesake brand. In the last few years, the company had taken write downs of more than $1 billion to reflect the erosion of the once leading fashion brand.

In its last fiscal year, sales at J.Crew brand fell 4% to $1.78 billion, continuing a deterioration in its business that started several years ago. In contrast, Madewell, a business barely one third the size of the J.Crew brand, saw sales jumped 26% to $529.2 million. In November, just before the peak of the holiday season, J.Crew Group’s CEO Jim Brett left after barely more than a year in the corner office.

Years of weak performance at the J.Crew brand have put enormous stress on the company’s finances: the company’s long-term debt as of February 2, 2019 stood at $1.67 billion, enormous for a company with sales of $2.5 billion, all the more since it has big liabilities coming due in two years. And the company lost $120 million last year, dimming the prospects for J.Crew to start to pay down the debt to a manageable level anytime soon. The high debt level stems in large part from a leveraged buyout led by private equity firm TPG in 2010.

J.Crew Group’s board no doubt was inspired in its Madewell plans by the sizzling initial public offering last month of Levi Strauss & Co. that valued it at $9 billion. Though Madewell is a far smaller brand, company executives have said they see the potential for it become a $1 billion-per-year brand in the not-too-distant future.

And last week, as Fortune reported, Madewell appointed its first ever CEO, Libby Wadle, a hint at its plans to potentially spin it off. J.Crew Group said a Madewell IPO could come as soon as the second half of 2019. In a move with similar echoes, the far stronger financially Gap Inc (GPS) said in February it would spin off Old Navy, a much larger and more successful chain than its struggling The Gap or Banana Republic brands, next year.

J.Crew Group said it was looking at a potential IPO of Madewell as a way to “deleverage and strengthen the Company’s balance sheet,” In other words, pay down debt. Two weeks ago, Reuters reported J.Crew. had hired debt restructuring lawyers.

In the last 15 years, J.Crew went from preppy catalog staple to multi-billion dollar apparel brand favored by style icons like of former First Lady Michelle Obama. Former creative director Jenna Lyons gave J.Crew fashion cred and buzz. But by 2015, cracks were starting to show in J.Crew’s business. The brand had gone too far upscale and fashion forward for customers that relied on it for stylish basics. It became too expensive in relation to quality that many shoppers felt was falling.

Since the departure of the former CEO, Jim Brett, J.Crew Group has been run by a so-called Office of the CEO, which included Michael Nicholson, its president and operations chief. He will take on the role of interim CEO. Adam Brotman, a high-profile digital expert J.Crew poached from Starbucks last year, is leaving the company.