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A Madewell IPO Could Help J.Crew’s Capital Structure

Credit ratings firm Moody’s Investors Service favors a Madewell initial public offering.

J.Crew Group Inc. on Thursday said it was reviewing strategic alternatives for the company, including a possible IPO for its Madewell business. J. Crew further said that the IPO, if pursued, could be completed “as early as the second half of 2019.”

The consideration of an IPO for Madewell is connected to J.Crew’s pursuit of “initiatives to maximize value, position both the J.Crew and Madewell brands for long-term growth and deleverage and strengthen the company’s balance sheet,” the company noted.

“With debt maturities on the horizon in 2021 and very high leverage, J.Crew faces an elevated risk of a second financial restructuring after its 2017 debt exchange,” Moody’s vice president and credit analyst Raya Sokolyanska, said.

According to the analyst, “If executed, a Madewell IPO could improve the capital structure and better position the company to address its debt.”

While the Madewell business accounts for less than a quarter of the company’s revenues, Sokolyanska said its “record of comparable sales growth over the last several years while the J.Crew brand suffered declines points to likely meaningful contribution to the overall company’s enterprise value.”

J.Crew last month posted a sizable fourth-quarter loss of $74.4 million versus net income of $34.7 million in the year-ago quarter. The loss reflects the impact of a $39.3 million charge for losses connected to inventory write-downs. Sales rose 3 percent to $733.8 million. By brand segment, sales at J.Crew were down 3.6 percent to $527.9 million, but rose 15.9 percent at Madewell to $157.9 million.

There are 202 J.Crew stores versus just 131 Madewell locations. Both operate its own website, as well as factory outlets.

Also on Thursday, J.Crew named Michael J. Nicholson interim CEO. Previously, he had been serving in the role of president and chief operating officer.