Blue jeans are having a moment. At least that’s what J. Crew Group Inc. is hoping as it considers bringing its Madewell business to the public markets in the wake of rival Levi Strauss & Co.’s own $623 million offering.
Madewell, the denim focused starlet of the J. Crew family, could go public as soon as the second half of this year, the company announced Thursday. Struggling parent company J. Crew also named Michael Nicholson as interim chief executive officer after months with no one in the post.
The potential spinoff “makes a lot of strategic sense because with a portfolio of brands—some strong, some weak—you are really restricted as to what you can do,” said Neil Saunders, an analyst at GlobalData Retail.
Madewell is a fast-growing brand and its potential separation could help J. Crew deleverage some of its hefty balance sheet. But it would also join an newly crowded market for public jeanswear companies at a time when Americans are still leaning heavily toward activewear.
Rival Levi went public last month, and VF Corp. is planning to spin off its jeans business, Kontoor Brands Inc., as a standalone company later this spring. Gap Inc.’s recent decision to split from Old Navy—both of which are big players in denim—introduces one more name to the mix. Meanwhile, imports of elastic knit pants surpassed those of denim for the first time in 2017, with the U.S. jeans category growing an anemic 2.2 percent last year after four straight years of declines.
Still, Madewell, popular with millennial shoppers, has been growing steadily. Its revenue climbed 26 percent last quarter, compared with a 4 percent decline at the namesake J. Crew brand. The apparel brand opened four new stores already this year and is planning about six more by February 2020, even as sister line J. Crew shuttered dozens of locations and rival mall stores like Gap ax hundreds more.
“Madewell already said they want to grow the brand quite rapidly. I think as part of J. Crew that might be difficult,” Saunders said. “J. Crew is highly debt-ridden and highly leveraged and no one wants to pump in more money.”
Libby Wadle will continue as president and CEO of Madewell. Meanwhile, new J. Crew chief Nicholson has his work cut out for him: While there’s been recent sales growth, cash on hand has been dwindling. The retailer had been without a chief since former CEO James Brett left abruptly in November.
The question executives at both J. Crew and Madewell need to ask themselves now is how will this possible spinoff affect their back-end functions, according to Poonam Goyal, an analyst with Bloomberg Intelligence. That includes supply chain, technology, distribution and logistics, she said.
“When you split these brands up, is it dilutive?” Goyal said. “And how dilutive is it to the fundamentals of the company?”