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Cleared to Spin Off Madewell, J.Crew Reports Widening Q3 Loss

J.Crew got the green light to continue with its proposed initial public offering for Madewell, the same day that the specialty apparel retailer disclosed a wider third-quarter loss attributable in part to lower sales for its core J.Crew brand.

In a Nutshell: The good news was that J.Crew has reached an agreement with lenders that now allows it to separate J.Crew and Madewell into two independent companies. The denim-lifestyle concept targeting millennials has been successful, but the holdup in a spin off of the brand stemmed from a dispute with lenders over J.Crew’s debt restructuring plan. With a new agreement in place, J.Crew can now proceed with the planned IPO and use the proceeds from the sale of a 40 percent stake in Madewell to help recapitalize its balance sheet. The lenders held $1.9 billion in debt that’s due in 2021.

Michael J. Nicholson, president, chief operating officer and interim CEO, said of the agreement, “As a result of the transaction, we expect both J. Crew and Madewell to have sustainable capital structures and to deliver enhanced value for our stakeholders.”

Net Sales: Total revenues for the three months ended Nov. 2 rose 0.6 percent to $625.6 million from $622.2 million. J.Crew said total comparable sales increased 3 percent on top of the 8 percent rise in the same year-ago quarter.

Sales at the J.Crew brand slipped 3.5 percent to $415.8 million from $430.9 million, while comparable sales were flat following an increase of 4 percent in the third quarter last year. Sales at Madewell rose 13.4 percent to $151.7 million from $133.7 million, while comparable sales rose 10 percent on top of the 22 percent gain in the year-ago period.

J.Crew said gross margin in the quarter increased to 40.7 percent from 38.3 percent last year. Selling, general and administrative expenses were higher in the current period, including $36 million related to the firm’s exploration of strategic alternatives to maximize the value of the company.

Earnings: The company widened its net loss to $19.9 million from a net loss of $5.7 million in the year-ago quarter.

CEO’s Take: According to Nicholson, “Our third quarter results reflect adjusted EBITDA growth of nearly 50 percent, marking our strongest third quarter performance in the last five years. These results reflect encouraging momentum at the J.Crew brand fueled by strong gross margin performance, continued growth at Madewell and the early benefits of our multi-year cost optimization program announced in September.”

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