J. Crew rating cut by Moody’s after EBITDA drops 28 pct

J. Crew, the New York retailer backed by Leonard Green & Partners and TPG Capital, drew a debt downgrade after posting a decline in EBITDA in the face of traffic and promotional challenges in its stores.

Moody’s Investors Service cut its rating after third-quarter adjusted EBITDA dropped 28 percent to $53.3 million from $73.6 million in the year-ago quarter. Its current debt load amounts to 11.5x EBITDA, Moody’s said.

“J. Crew has taken action to improve sales and profitability, such as managing inventory and expense levels down, implementing sourcing and supply chain improvements, and closing underperforming stores,” Moody’s analyst Michael Zuccaro said in a Dec. 1 research note. “Moody’s expects that improvement will take time as challenges persist.”

The company faces a debt maturity in May 2019, giving it “limited time … to meaningfully improve profitability and deleverage towards a sustainable capital structure,” Moody’s said.

The debt-research firm downgraded J. Crew Group’s corporate-family rating to Caa2 from B3, with a stable outlook on its roughly $2.1 billion of debt. The Caa rating means the company is highly vulnerable to non-payment, and ultimate recovery is expected to be lower than that of higher rated obligations, according to Moody’s definitions.

Moody’s sees adequate liquidity at the company despite its “expectation that weak earnings will pressure free-cash-flow generation” over the next year.

The retailer is led by CEO Millard “Mickey” Drexler, former CEO of Gap Inc.

In a statement Drexler said J. Crew expected traffic challenges and a highly promotional retail environment to persist in Q4. The company hopes to drive sales productivity and manage inventory and expenses. It’s also pursuing fresh operational initiatives.

Leonard Green and TPG teamed in 2010 to buy J. Crew in a $3 billion take-private.

At the time, the price represented a 29 percent premium to J. Crew’s average closing share price over the previous month.

In 2013, the company paid a $500 million dividend financed by debt.

As of Nov. 22, J. Crew operated 287 J. Crew retail stores, 110 Madewell stores, 181 factory stores, as well as online and catalog sales outlets.

A spokesman for TPG declined comment. A Leonard Green spokesman did not answer an email.

Action Item: J. Crew’s latest results, http://investors.jcrew.com/phoenix.zhtml?c=135311&p=irol-irhome&ver=jc

The J. Crew store at 347 Madison Ave. in Manhattan on Dec. 7, 2016. Photo by Buyouts Staff.