J. Crew Group Inc. denim brand Madewell has filed to go public in a deal expected to be completed in the first quarter of fiscal 2020.
Madewell has seen its sales grow even as J. Crew struggles. Both J. Crew and Madewell have operated under the J. Crew Group umbrella, under which the eponymous brand was long the unchallenged superstar, with its then–creative director, Jenna Lyons, becoming a style icon and celebrity in her own right and then–CEO Mickey Drexler hailed as a titan of the retail industry. With shifts in shopping and fashion trends, J. Crew has been challenged.
On an earnings call with analysts on Monday, the company said it has full approval from its creditors and expects the deal to recapitalize its balance sheet.
“J.Crew will benefit from a deleveraged balance sheet that will facilitate our commitment to return J.Crew to profitable growth over time,” interim Chief Executive Michael Nicholson told analysts, according to a FactSet transcript.
“While J. Crew continues to struggle, Madewell has emerged as the company’s crown jewel, accounting for the majority of profits,” Raya Sokolyanska, vice president at Moody’s, said in September.
“The IPO could garner a substantial valuation and help pay down a meaningful portion of the over $1.7 billion in debt, but the ultimate ability to address J. Crew’s highly leveraged capital structure depends on the public market’s receptivity to apparel retailers and the company’s operating performance.”
The S-1 filed with the Securities and Exchange Commission is for the holding company Chinos Holdings Inc., but the company plans to change its corporate name to Madewell Group Inc. after the public offering is complete. J. Crew Group, acquired by private-equity interests including TPG Capital and Leonard Green & Partners in 2011, has operated as an indirect subsidiary of Chinos Holdings Inc. J. Crew Group is also slated to be spun off after the Madewell initial public offering. (J. Crew Group Inc. was publicly traded from 2006 until the private-equity buyout five years later.)
These steps are parts of a series of transactions that are set to take place as part of a reorganization. Madewell says it will use the net proceeds of the IPO, along with net proceeds from transactions associated with the reorganization, to pay off debt. The company doesn’t intend to offer a dividend.
J. Crew provides some services for Madewell, and that arrangement will continue for a specified period of time after the IPO.
Madewell has yet to determine how many shares it will sell in its IPO or what its ticker symbol will be. It will trade either on the Nasdaq or New York Stock Exchange, and it says it plans to raise $100 million, a placeholder sum that many companies use initially in their S-1 filings.
Madewell launched in 2006, and Libby Wadle, the company’s current chief executive, has been involved since the beginning. She is set to continue on as CEO after the IPO. The company’s merchandise takes inspiration from “American workwear,” with leather jackets, tees and totes among the focus items, in addition to jeans. (The Madewell brand name dates back nearly a century, and, under CEO Drexler, was acquired by J. Crew in 2004.)
Madewell had fiscal 2018 revenue of $614 million, up from $464 million in fiscal 2014.
Denim is not only a big seller for the Madewell brand; it’s also one of its highest growth categories. Madewell’s denim products are priced in the $100-to-$150 range, with the “entry-level” Roadtripper jean, introduced in 2017, offered at $75.
“We believe a substantial portion of the population anchors their everyday wardrobes around denim — and not just for weekends but also increasingly for work and social occasions,” reads the Madewell prospectus.
The company ties 12% of denim sales to shoppers who are participating in its recycling program, which launched five years ago. The recycling program offers customers a $20 discount on a new pair of jeans when they recycle a used pair. The company has recycled more than 600,000 pairs of jeans, according to a prospectus letter signed by CEO Wadle. The recycled denim is made into insulation used in homes built by the charitable organization Habitat for Humanity.
Madewell has a focus on fabric technology, including proprietary sustainable fabrics and a fade-resistant black denim, as well as technology focused on fit. Boasting of inclusivity, the company offers jeans in waist sizes 23 through 37 and a range of inseam lengths.
More than half of the company’s 2018 revenue (52%) was attributable to items like T-shirts, footwear and leather goods, which it calls “everything you wear with jeans” items. Lifestyle offerings such as dresses, swimwear and beauty items made up 19% of sales.
Madewell also partners with brands like the VF Corp.
shoe brand Vans and the popular athleisure brand Outdoor Voices.
In 2018, 37% of sales were attributed to e-commerce and for the first half of 2019, e-commerce represented 40% of sales.
The company’s members program, Madewell Insider, which is designed to enhance consumer engagement, offering exclusives and promotions. In 2018, 60% of active customers were members of Madewell Insider.
Madewell had 2.6 million active customers in 2018, up from 2 million the previous year, and 1.7 million in 2016. Active customers are defined as those who have made a purchase of any Madewell product during the previous 12 months.
Madewell operated 132 stores in the U.S. as of Aug. 3, with most located in upscale malls, “lifestyle centers” and on key shopping streets. The stores’ average size is 3,400 square feet, attracting an average of $1,100 in sales per selling square foot in 2018. Madewell plans to open 10 to 15 stores each year “for the foreseeable future.”
Thirteen percent of the company’s sales come through wholesale channels, a distribution channel it launched with Nordstrom Inc.
in 2015. Other wholesale retailers include Shopbop and Stitch Fix Inc.
Net income in 2018 was $60.4 million, up from $44.5 million the previous year.
Here are five more things you should know about Madewell as it prepares to go public:
Madewell could be impacted if J. Crew were to file for bankruptcy
In the event of a J. Crew bankruptcy filing, Madewell assets could be consolidated with J. Crew and its debtor subsidiaries in order to satisfy claims.
“The substantive consolidation of our assets and liabilities with J.Crew’s in connection with any J. Crew bankruptcy case could have a material adverse effect on our business, financial condition and results of operations,” the prospectus said.
Madewell could be affected by an escalation of the U.S. trade war with China
Madewell said 60% of its products were manufactured in China in fiscal 2018.
“[I]f additional tariffs or trade restrictions are implemented by the United States or other countries in connection with a global trade war, the cost of our products manufactured in China or other countries and imported into the United States or other countries could increase, which in turn could adversely affect the demand for these products, or our margins on such products could decrease, negatively impacting our profitability,” according to the prospectus.
Madewell’s inexperience could be a hurdle
Madewell admits that running a business at its current size is new to it. As it gets bigger, the company says its inexperience could be a risk factor.
“If our operations continue to grow, of which there can be no assurance, we will be required to continue to expand our sales and marketing, product development and distribution functions to upgrade our management information systems and other processes to obtain more space for our expanding administrative support and other headquarters personnel,” the prospectus concedes.
The risk is heightened by the fact that a lot is riding on the company’s retention of its CEO. “[T]he loss of the services of Libby Wadle … would significantly impede implementation and execution of our business strategy and may result in the failure to meet our goals,” the company said.
Climate change could hurt the supply chain
In addition to any impact from extreme weather on Madewell store traffic, the company said climate change could impact inventory.
“Changes in weather patterns and an increased frequency, intensity and duration of extreme weather conditions could, among other things, adversely impact the cultivation of cotton, which is a key resource in the production of our products, disrupt the operation of our supply chain and the productivity of our contract manufacturers, increase our product costs and impact the types of apparel products that consumers purchase,” the company prospectus said.
Madewell may end up competing against J. Crew
Not only could J. Crew ultimately end up being a competitor to Madewell after the spinoff occurs, but Madewell warns that J. Crew may have an advantage since it’s the better-known brand.
“The loss of J. Crew’s scale, capital base and customer and supplier relationships may also prompt suppliers to re-price, modify or terminate their relationships with us,” the prospectus said. “In addition, J. Crew’s reduction of its ownership of our company could potentially cause some of our existing agreements and licenses to be terminated.”
Madewell also highlights the risks that come with being a specialty retailer in the current landscape. There are plenty of competitors in the denim space, including American Eagle Outfitters Inc.
and Levi Strauss & Co.
, the iconic denim brand that this year returned to the public market, as well as department-store retailers, fast-fashion and digitally native brands.