2 major problems haunted J. Crew even before coronavirus arrived

• J. Crew Group filed for bankruptcy as the coronavirus pandemic has forced temporary store closures.
• But the retailer was facing at least two major challenges even before the crisis — namely, a heavy debt load and a struggle to find its identity.
• "They will have to signal that their brands are durable, provide a huge amount of value, and can connect with consumers in a way that they will have long-term usefulness during this time," Kalinda Ukanwa, assistant professor of marketing at the University of Southern California's Marshall School of Business, told Business Insider.
• Visit Business Insider's homepage for more stories.

J. Crew Group filed for Chapter 11 bankruptcy protection on Monday.

Like many others in the apparel space, the company, which operates J. Crew, Madewell, and J. Crew Factory stores, has struggled as stores have been forced to temporarily close amid the coronavirus outbreak.

But experts say that J. Crew is facing challenges that have been festering since well before the coronavirus became a serious threat.

First among them is the company's massive debt load.

J.Crew has struggled with debt for some time. It had nearly $1.7 billion in debt as of February.

According to the Wall Street Journal, it had planned to leverage a 2020 IPO of its popular Madewell brand to lessen the load. However, plans for the IPO were abandoned near the end of March as the company failed to reach a deal with lenders.

As part of its bankruptcy filing, the company said it had reached an agreement with its lenders to convert about $1.65 billion of its debt into equity.

Wading through an identity crisis

A second issue will lie in figuring out J. Crew's position in the apparel market.

"Before Chapter 11, J.Crew was on a slow march to ruin," Neil Saunders, managing director of GlobalData Retail, told the Associated Press. "This process gives the company a chance to survive. However, that survival is not just dependent on reduced debt; it requires a reinvention of the J. Crew brand."

In recent years, there's been a consumer shift towards either end of the price spectrum, which has been good for value and luxury brands but troublesome for everyone in the middle.

"Retailers like J. Crew, in the middle, have felt the squeeze because of the shift," Kalinda Ukanwa, assistant professor of marketing at the University of Southern California's Marshall School of Business, told Business Insider. "With J. Crew, they're not quite as expensive as some other high-tier brands, but they're not quite as cheap as lower-tier brands."

The challenge, Ukanwa said, will lie in convincing customers that its products are worth buying even if they're not the best value or highest quality on the market.

In an interview with the Wall Street Journal in 2017, former J. Crew CEO Mickey Drexler said the biggest mistake the retailer had made over the previous several years was in raising prices during a period when shoppers were becoming more cost-conscious. At the time, it was selling items like $800 shirts and a $3,000 jacket with hand-sewn tortoiseshell sequins.

"We gave a perception of being a higher-priced company than we were — in our catalog, online and in our general presentation," Drexler said. "Very big mistake."

These days, the retailer is more often selling tops in the $70-$80 range, dresses in the $115-$140 range, and men's dress shirts in the $60-$70 range, though there are certainly some more expensive outliers.

Drexler left his post in 2017 after 14 years as CEO. J. Crew also lost longtime creative director Jenna Lyons and narrowly avoided bankruptcy around the same time.

A way forward could be figuring out what has worked with Madewell and applying those lessons to J. Crew.

Madewell, which J. Crew launched in 2006, has been a bright spot for the company. But during the pandemic, even Madewell is running unprecedented sales seemingly in a bid to off-load inventory.

J. Crew reported that comparable sales for the company increased by 2% for the 2019 fiscal year, with comparable sales growing 10% at Madewell and shrinking 1% at J. Crew.

Madewell's marketing consistently emphasizes durability, especially in its denim offerings. Value and durability will be especially important as consumers become more budget-conscious in the wake of the coronavirus.

"They will have to signal that their brands are durable, provide a huge amount of value, and can connect with consumers in a way that they will have long-term usefulness during this time," Ukanwa said.

Customers can continue to shop online throughout the bankruptcy proceedings. Loyalty programs, gift cards, and returns and exchanges are also unaffected. The retailer said it did not expect the bankruptcy proceedings to impact its ability to reopen stores in states that are allowing "nonessential" retail locations to operate once more.

"This agreement with our lenders represents a critical milestone in the ongoing process to transform our business with the goal of driving long-term, sustainable growth for J. Crew and further enhancing Madewell's growth momentum," Jan Singer, the CEO of J. Crew Group, said in a statement on Monday.

She continued: "Throughout this process, we will continue to provide our customers with the exceptional merchandise and service they expect from us, and we will continue all day-to-day operations, albeit under these extraordinary COVID-19-related circumstances. As we look to reopen our stores as quickly and safely as possible, this comprehensive financial restructuring should enable our business and brands to thrive for years to come."

Do you work at J. Crew and have a story to share? Contact this reporter at mstone@businessinsider.com.

Read the original article on Business Insider