Paying roughly $60,000 a month for a hillside bungalow at the Beverly Hills’ Chateau Marmont is every raucous cool kid’s dream, but J. Crew forking out the same amount for a 6,000-square foot lease in Williamsburg – when its creditors are mulling over a potential bankruptcy – takes the aspirational-hipster filter to a whole new level.
Quick to jump on the bandwagon amid the commercial boom on and around Wythe Avenue over the past 24 months, the preppy retailer opened its doors late last year in a single-story warehouse building at 234-236 Wythe Ave. near 4th Street.
The store, which is located near the high-rent waterfront in what is arguably Williamsburg’s most gentrified area, was tipped to benefit from the spate of newly constructed high rises, converted soda factories and converted warehouses peppered nearby – both in the fashion stakes and on Wall Street. But that prospect, amid sluggish sales and a deeply-discounted approach to the holidays – has lost its sparkle. Think Giuliana Rancic’s post being ditched from E! News or Mariah dealing with the PR fallout from a botched Rockefeller Christmas Tree live-taping hot mess.
The upmarket lease is at odds with the around $800 million write-down of the brand’s future profitability and value of the J. Crew trademark – news which was conveniently buried when it delivered its third-quarter results last Thursday. The Company reported total sales of $619.4 million, down 6 percent on the prior year, driven by an eye-watering 9 percent decline in J. Crew sales, or 12 percent in comparable sales terms. This followed a 10 percent decline last quarter.
Former Gap CEO and J.Crew front man Mickey Drexler admitted on a conference call in June that the company had, “Just made mistakes”, which is a bit like Lamar admitting to “an interest in women’s rights, and romance,” as the reason for being found unconscious in a room at the Love Ranch in Vegas. Drexler took the business private with private equity giants TPG Capital and Leonard Green & Partners LP in 2011, and rumors began swirling in February last year that its owners were in talks with investment banks about an exit strategy by way of an IPO sometime last year. Write-downs of the brands carrying value is starting to feel like a quarterly event, reminiscent of their sample sale of the same frequency. The lofty $3 billion valuation paid by the Company’s owners in their Nov. 2010 buyout is looking out of reach given equity market jitters and the firm’s flailing earnings.
As a further sign of how tight cash is at the brand, the company elected to pay the next May 2016 interest payment on their outstanding notes in PIK, or Payment in Kind, form. The result being an approximate $20 million increase in total debt – a move that is likely to make bond holders increasingly nervous and as apprehensive as a customer about to shove themselves into a pair of size 2 jeans following an eight-month hibernation New York winter.
Crew’s $500 million 7.75 percent senior unsecured bonds maturing May 2019 last traded around 25.5 cents on the dollar on Friday, having shed about 60 percent of their value this year, according to Bloomberg. The securities, which were issued in Oct. 2013, were trading above 60 cents on the dollar in April, making the company’s bonds the worst-performing retail debt in the U.S. and causing Moody’s to revise its credit ratings for J. Crew to negative, from stable, in September.
At 25 cents on the dollar, a level of bonds typically referred to as “junk”, the securities are almost as cheap as the pile of lumpy grey librarian-friendly sweaters I found this week at the company’s seasonal sample sale on Fifth Avenue. Excess inventory is forcing the struggling retailer to resort to heavy discounting, which doesn’t bode well for earnings during the busy holiday period. A combination of continued cheap prices and a flailing bottom line, has a number of distressed debt and vulture funds circling, positioning themselves for what looks like an almost certain restructuring.
But back to the company’s hip beacon of industrial light on Wythe St in Williamstown. While the store has a raw industrial feel amid a contrived effort to blend in with the top-knot hipsters bar-hopping their merry way about the surrounding Instagram-friendly area, the primary color and pastel cashmere knits and classic, basic leather totes housed inside fail to evoke the neighborhood’s coveted sense of cool. One local bartender suggested J. Crew was forking out around $56,000 a month for the space, while previous reports claimed the retailer was paying a lesser $90 per-square-foot, in addition to the $3.5 million it forked out for initial improvements at its Brooklyn-based store. Forget Woody Allen’s classic ode to Manhattan, this price tag is enough to make the fashion-obsessed Carrie Bradshaw choke on her cosmopolitan.
On one visit, Curbing the Catwalk noted the store was empty, but for three screaming children and a former hipster that had since graduated to family status (No, it wasn’t Sarah Jessica Parker). On another occasion – a day marked as the cash-cow generating Black Friday sale – the store was absent of any signage informing customers of any specific mark downs, and almost every customer questioned employees whether any items were indeed discounted.
As an owner of the Chateau Parker – not to be confused with the aforementioned hotel of the same name – in red, I dropped in to snap up one, or maybe two, more of the style in blue and yellow, given I had received an email notification about every item, “Even the ones that never go on sale!” was now 40 percent off. But, upon inquiring with a sales associate whose job for the day appeared to be verbally doing the job of a discount sign by informing customers that, “Yes, some items actually were on sale!”, I learned that the Chateau Parker, one of their strongest selling lines, was not included, and hence I walked out empty handed and $730 the wiser.
After reading the fine print referenced by the double asterisk below the J. Crew’s “Big, huge, gigantic, amazing, incredible…” sale email, I was informed that my desired item was not valid under its 40 percent offer, which again I would have been unaware due to the lack of discount banners in store, which is a bit like Kylie Jenner telling a little white lie about her lips/tits/butt any body item.
So despite giving in to the temptation to head to J. Crew’s current sample sale at 260 Fifth Avenue for a deeply discounted derivative of the Chateau Parker this week, given the state of the brand’s tenuous debt position as its owners grow increasingly itchy about the need to exit, the bigger question for me was whether I should wait a quarter for post restructure fire sale prices at which to purchase a cheaper one.
J. Crew’s holiday campaign features a hipster couple dressed for a black tie affair, surrounded by snow-covered Christmas trees and leading a reindeer while carrying a naked baby outside in a winter wonderland, and includes shout-outs to the New York ballet, Hansa Toys, Frog Hollow organic farm, King Arthur Flour gingerbread houses, Living Christmas eco-friendly trees, Goods 4 Good giving back program Quark Expeditions North Pole adventures and Hammonds Candies peppermint canes. While combined they convey the Tough Mudder of the hipster family on steroids its Williamsburg location is so painfully trying to lure in, perhaps the struggling retailer should focus less on its identity crisis and more on its preppy roots to improve its bottom line, or else, as market watchers have suggested, a brand management company might swoop in and cull the top knot, thereby enabling them to perform the audit for it.
