J. Crew Files for Bankruptcy in Virus’s First Big Retail Casualty

J. Crew, the mass-market clothing company whose preppy-with-a-twist products were worn by Michelle Obama and appeared at New York Fashion Week, filed for bankruptcy protection Monday. It is the first major retailer to fall during the coronavirus pandemic, although other big industry names including Neiman Marcus and J.C. Penney are also struggling with the toll of mass shutdowns.

J. Crew announced that its parent company, Chinos Holdings, had filed for Chapter 11 protection in U.S. Bankruptcy Court for the Eastern District of Virginia. As part of its financial reorganization plan, it will hand over control to top creditors, including the hedge fund Anchorage Capital, by converting $1.65 billion of its debt into equity. The company, which has secured a $400 million debtor-in-possession loan, also plans to hold onto its Madewell brand, which it had considered spinning off into a public company.

J. Crew added that its online business would continue to operate normally throughout its restructuring, and that it planned to reopen its J. Crew and Madewell stores once lockdowns are lifted. Gift cards and returns and exchanges would not be affected, it said in a message to customers, adding that it planned to serve shoppers “for years to come.”

“This agreement with our lenders represents a critical milestone in the ongoing process to transform our business,” Jan Singer, J. Crew’s chief executive, said in a statement.

The company had been in negotiations with lenders on how to handle its debt for weeks and made the decision after its board conferred Sunday evening, according to two people with knowledge of the situation, who spoke on the condition of anonymity because discussions were confidential.

The pandemic has been disastrous for the already weakened retail industry. In March, sales of clothing and accessories fell by more than half. The numbers for April are expected to be worse, because many stores were open for at least some of March (e-commerce, a relatively small contributor to total sales for most store chains, is not enough to make up for the closures).

Retailers have furloughed employees, slashed executive salaries and hoarded cash in a desperate attempt to survive until the shutdowns are lifted. And there is widespread acknowledgment that J. Crew is unlikely to be the only retailer to face the brink.

J. Crew was carrying a debt burden of $1.7 billion based on a leveraged buyout in 2011 by two private-equity firms — TPG Capital and Leonard Green & Partners — even before the coronavirus brought clothing sales to a near-halt in its 181 stores, 140 Madewells and 170 outlets. It had also struggled to adapt to changing consumer tastes.

But it seemed to be making strides in recent months toward a more viable future. The company named Singer its new chief executive in January and was planning an initial public offering of Madewell this spring in order to pay down some of the debt and rehabilitate the J. Crew brand.

The coronavirus pandemic scuttled those plans and eventually toppled the company. J. Crew started life in 1947 as a family-run low-priced clothing line for women called Popular Club Plan, and in 1983 it was renamed and reinvented as a catalog company selling turtleneck tops and crew neck sweaters in “Preppy Handbook” shades. It made the leap to household name and 21st century fashion fairy tale in October 2008 when Obama, whose husband was then the Democratic candidate for president, appeared on “The Tonight Show With Jay Leno.”

This was just days after it had been revealed that Sarah Palin, the Republican candidate for vice president, had been given a costly wardrobe makeover. “I want to ask you about your wardrobe,” Leno said to Obama. “I’m guessing about 60 grand? Sixty, 70 thousand for that outfit?”

“Actually, this is a J. Crew ensemble,” Obama replied, referring to her $148 yellow pencil skirt, $148 yellow and brown print tank top and $118 matching yellow cardigan. “Ladies, we know J. Crew. You can get some good stuff online!”

It was a priceless marketing moment. After that, everyone knew J. Crew, which seemed to embody the high/low mix-and-match trend of the moment.

The company was purchased by TPG in 1997 in a leveraged buyout from the founding Cinader family, and was taken public in 2003 — only to be reacquired for approximately $3 billion by TPG and Leonard Green & Partners nearly a decade ago.

Its creative director, Jenna Lyons, who first joined as part of the design team in 1990, became a boldface name, known for her black-rimmed glasses, gangly frame and love of sequins and camouflage. Newspaper reports crowed about the comeback of the company’s chief executive, Millard S. Drexler, who had previously led Gap Inc. for years. Drexler, who goes by Mickey, became famous for riding his bicycle around the office and checking in with store associates via speakerphone.

In 2011 J. Crew became the first mass-market accessible brand to breach the high fashion parapet and present at New York Fashion Week. Vogue crowned the brand “a significant voice in the conversation on American style.” As the face of the brand, Lyons attended the Met Gala and, in 2014, played a role on the HBO show “Girls.”

In 2017, however, after two years of falling sales, Lyons left the company. J. Crew, the criticism went, had gone too fashion, falling into the trap of prizing quirk over quality and pricing itself out of practicality. It had diminished its own brand with a heavy push into outlet merchandise. (There are now nearly as many full-price J.Crew stores as factory stores.) And it had never focused enough on e-commerce. Madewell, its younger, simpler — “more authentic” — sister brand, acquired by Drexler in 2006, was the company’s new shining star. Indeed, after Lyons left, Madewell’s designer, Somsack Sikhounmuong, who had switched over to J. Crew in 2015, took the top creative spot. Much was made of a return to core values.

It was too little, too late. For a fashion brand to thrive it must be either needed or wanted. J. Crew, sitting somewhere in the netherland of style and price, was neither. A few months after Lyons’ departure, Drexler stepped down and Sikhounmuong left two months later, starting a round robin of executives and designers. That served ultimately to confuse rather than clarify the identity of the company and its strategy. Jan Singer, formerly of Nike and Victoria’s Secret, was named J. Crew’s newest leader in January.

Madewell, which filed for an IPO in the fall, was expected to go public this spring while J. Crew remained private, but those plans were ultimately scrapped in March, as the stock market spiraled, adding a new wave of pressure and question marks to J. Crew’s future.

J. Crew clearly had plenty of problems even without its massive debt load. Ongoing interest payments and looming maturities only added to the company’s challenges, and in the eyes of some, left it ill-equipped to adjust to a new shopping environment.

As the retail landscape has shifted, “these businesses have faced a huge investment need,” said Raya Sokolyanska, a senior analyst at Moody’s. “Having a burdened balance sheet certainly greatly diminishes their chances of doing this successfully.”

That’s even more challenging for fashion retail, she said, which is “notoriously fickle.”

Now the question is whether the upheaval of the retail industry — which predates the pandemic, with the collapse of Barneys New York late last year — will continue. “The companies going into bankruptcy, for the most part, were companies that were struggling before COVID — we have not seen true COVID-only bankruptcies,” said James Van Horn, a partner at the law firm Barnes & Thornburg and a specialist in retail bankruptcy.

However, he added, “depending on how the current situation continues, that may change.”

For instance, Brooks Brothers, another quintessential American shopping institution, is already facing questions about its future.

“In the ordinary course of business, Brooks Brothers consistently explores various strategic options to position the company for growth and success, in partnership with its financial advisers at P.J. Solomon,” a spokesman said, in response to question about a potential sale.