J.Crew losses Moody's favour after bonds slump

J. Crew’s parent group Chinos Intermediate Holdings has seen its rating cut down by Moody’s. The rating firm explains that "The negative outlook reflects the persistent declines in J. Crew's operating performance due to weak execution and challenging industry environment."

The lower rating on J.Crew´s outlook “reflects its high debt burden stemming from its 2011 LBO, aggressive financial policies and declining operating earnings. The rating is also constrained by J.Crew's relatively small scale and high business risk as a speciality apparel retailer, which exposes the company to performance volatility as a result of fashion risk or changes in consumer spending.”

Moody´s lowered rating on J.Crew comes after another month of declining sales

It is noteworthy that preppy fashion firm J.Crew is going through the middle of an ambitious turnaround plan, although its sales are still at the down.

In August, sales at stores open at least a year (comparable sales) were down by 13 percent from the same quarter last year. This decline adds to the steady slump the retailer has suffered for more than a year.

"While the second quarter is certainly not where we'd like it to be, our performance was in line with our expectations," CEO Mickey Drexler said on a recent earnings call. "We'd anticipated the second quarter to be challenging as we work through spring and summer inventory."

Getting J. Crew shoppers to pay full price, an achievement Moody's says is essential for the company's future success, could be challenging.

Especially as the former brand´s loyal fans have been disappointed on J.Crew recent “gaudy and overpriced” garments, as well as by the ill-fitting sweater that used to be the chain´s favourite.

To recover its previous ‘stable’ outlook, “would require that the company return to profitable growth and positive annual free cash flow, and improve EBITA/Interest above 1.0x on a sustainable basis. While unlikely in the near term, J. Crew's ratings could be upgraded if the company sustainably improves performance and profitability such that debt/EBITDA approaches 6 times and interest coverage exceeded 1.75 times while maintaining a good liquidity profile,” explained Moody´s analysis team in a note to investors.