Credit ratings agency downgrades outlook on J. Crew

The apparel retailer continues to struggle with selling clothes consumers want to buy at full price. Now it faces a slowing economy.

When J. Crew Group emerged from bankruptcy in 2020, the long suffering company perhaps had reason to hope.

The apparel chain had successfully converted $1.6 billion of debt into equity. Investors led by hedge fund Anchorage Capital Management lent it a credit line of $400 million. And as the pandemic eased last year, consumers rushed back to stores and spent money, giving J. Crew and other apparel retailers a nice sales bump.

Unfortunately, the good times did not last long. The post-covid sales surge has largely dissipated. This year, analysts expect consumers to cut spending on apparel and footwear in the face of higher prices and a slowing economy. And J. Crew, which has long struggled to keep up with its more fashion forward competitors, once again looks mighty vulnerable.

Last week, credit ratings agency Standard & Poors cut its outlook on Chinos Intermediate 2 LLC, the parent company of J. Crew, to “negative” from “stable.”

The firm noted J. Crew’s operating margins and free cash flow declined in the third quarter because of a “tougher promotional environment.” That means J. Crew had to offer big sales and discounts to move its inventory of unsold clothing.

“We expect these headwinds to persist because of challenging macroeconomic conditions, including a shallow recession expected in 2023,” the report said. “In addition, we expect comparable sales trends to soften in 2023 as consumers become more selective with discretionary spending, in contrast with the growth trends after the economy reopened post-pandemic.”

To be fair, other apparel retailers are struggling. Last July, S&P reduced its outlook on Gap Inc.  (GPS) - Get Free Report to negative because of economic challenges and “execution missteps” with its Old Navy brand.

“Gap did not keep its good operating momentum from 2021 as high inflation hampered consumer demand and the company struggled to manage inventory effectively because in part of the shift away from casual apparel,” S&P said.

Express Inc.  (EXPR) - Get Free Report, which reports fourth quarter earnings on Friday, said comparable sales from July to September fell a whopping 8%.

Bottom line: U.S. specialty apparel chains continue to mismanage their inventories, prices, and merchandising. And consumers will only get pickier this year.

J. Crew, though, is more vulnerable, given its diminished size and lack of financial resources. Yes, the company wiped out its debt through bankruptcy and received $400 million from investors.

But no amount of financial wizardry can solve the company’s fundamental problem: selling clothes that consumers want to buy at full price.