Mystery Solved

I puzzled at length over J. Crew’s deep discounts and Mickey Drexler’s “retirement” several weeks ago. Then, in late March, J. Crew shared financial results for the quarter ending February 2, 2019, and suddenly, the question I posed at the end of my rant had an obvious answer: J. Crew was running fire sales because its inventory had ballooned to $390.50 million but its cash and cash equivalents had dwindled to a mere $25.7 million. With current liabilities of about $669 million, no wonder Stefan Larsson turned down the CEO position. Who wants to be remembered as the CEO who led J. Crew into bankruptcy?

I am fuming. More mad than I should be for someone who is not a J. Crew shareholder, or a stakeholder with real skin in the game.

Because J. Crew didn’t have to fail. If Drexler, TPG Capital, and Leonard Green & Partners hadn’t taken it private and loaded it with billions of dollars of debt, it might have a longer runway to deliver a turnaround.

But like Gymboree–taken private by Bain Capital less than a month before J. Crew’s delisting in 2010 (Gymboree filed for bankruptcy for the second time in three years this January)–and Toys “R” Us–bought out in 2005 by Bain, KKR and Vornado Realty Trust–J. Crew might soon be on the path to bankruptcy.

Without liquid assets, J. Crew is in an impossible situation: it needs to discount heavily to come up with money for interest payments and other expenses (operating loss and interest expense added up to $99 million last quarter). Consequently, it can’t invest in better inventory or its stores or the ecommerce platform because it’s so highly leveraged.

And this predicament further explains the second part of the mystery: why did Mickey Drexler “retire”?

Because, as a seasoned investor, he recognized a situation that Warren Buffett once described: “Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”

So Mickey cut his losses and abandoned ship. He is now backing Alex Mill, which looks like a DTC J. Crew.

I know it’s silly to get sentimental about the possible demise of a poorly run company. Still, it’s hard to accept that the J. Crew of yesteryears is on its last legs, even if it successfully reworks its debt.

What I would love now is for Ralph Lauren, which has a cool billion in cash and net receivables and a similarly preppy aesthetic, to negotiate a deal to buy J. Crew. Even to an outsider, it’s obvious there’s a plethora of synergies to exploit there.

Sigh. I know I am overreacting here, because I do love J. Crew. Yes, I wish its stores offered a better shopping experience. And yes, I wish it made fewer plain t-shirts, because there are already too many retailers trying to capitalize on “comfort” dressing. But its current struggles just feel so unnecessary, and so imbued with human failing.

I’ll end this post with a plug for the new J. Crew sale, because it’s probably running low on cash again: Until 04/11/19, take 40% off full-price styles at J. Crew with code REFRESH. My picks:

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