| May 18, 2020
Here in the US, the hard-pressed retail industry has suffered the first of what is likely to be a string of bankruptcies. Last week fashion retailer J. Crew and department store Neiman Marcus both filed for Chapter 11. While neither brand could be considered strong, the real issue was the debt load both companies were carrying. The Great Lockdown simply delivered the coup de grâce.
The stories of J.Crew and Neiman Marcus highlight the fact that weak demand and a bad balance sheet are a very negative combination. While the bankruptcies were triggered by the COVID-19 lockdown, it likely just hastened the inevitable, as the two companies struggled to adjust to changing trends and invest in demand building while servicing the high debt loads brought on by leveraged buyouts.
J. Crew has been described as “the apotheosis of New England prepster style”, offering clothes for women and men that would not look out of place in the Hamptons, Long Island, or Newport, Rhode Island. In October 2008, Michelle Obama appeared on The Tonight Show With Jay Leno and, in response to a question suggesting her outfit must have cost tens of thousands, replied, “Actually, this is a J. Crew ensemble. Ladies, we know J. Crew. You can get some good stuff online!”
The instant publicity caused a dramatic shift in perceptions of J. Crew the brand. Between 2008 and 2009, as measured in BrandZ, the perception that J. Crew was different from other female apparel brands jumped from an index of 83 to 101 (where 100 is the category average). As people got around to shopping some discovered that the brand did offer “good stuff” and its meaning also increased. In 2011 J. Crew presented at the New York Fashion Week, a first for a mass-market brand.
However, success was destined not to last. Also in 2011, TPG Capital LP and Leonard Green & Partners LP took J.Crew private in a $3 billion leveraged buyout. Whether simply a matter of timing, or because the cost of servicing debt detracted from investment in infrastructure and design, the brand’s trajectory began to peak and then decline. By 2015, The New York Times reported that J.Crew's women's division was suffering falling sales and margins due to failure to react to the "fast fashion" and "athleisure" trends. By 2017, BrandZ found that J. Crew’s perceived differentiation was back where it started, with 48% of women agreeing that it was worth less than it costs, ranking it alongside brands like Victoria’s Secret, Banana Republic and Tommy Hilfiger.
If J. Crew was a victim of what analysts describe as a “bad balance sheet,” then Neiman Marcus’s was truly awful. J. Crew was reported to be carrying a debt burden of $1.7 billion, which is dwarfed by Neiman Marcus’s reported $5 billion. Combine that load with closed stores and high rents and it is little wonder that CEO Geoffroy van Raemdonck has sought bankruptcy in order to restructure. However, financial restructuring may simply stave off the inevitable unless the brand can rekindle demand.
The problem is that Nieman Marcus’s brand is not that strong. While it is seen to be different from other department stores, it is not necessarily seen to be meaningful. Like Pier 1 Imports, for many shoppers it suffers from being different in a bad way. Compared to a department store average of 39%, a staggering 55% suggest the store is worth less than it costs, ranking it alongside Saks Fifth Avenue and Bloomingdales.
That profile might be just fine if the brand was relevant to some, but the signs are that Nieman Marcus’ offering was simply out of touch with the times. The brand’s meaning has been in decline for some years, while its perceived differentiation has been increasing, suggesting a shrinking appeal. Intriguingly, both J. Crew and Nieman Marcus have the same archetype in BrandZ, that of the Monarch. However, of the two, Nieman Marcus comes across as a despotic queen. Both brands are seen to be more assertive than their competition but Neiman Marcus is also arrogant, sexy but not friendly, and less trustworthy than might be expected. Again, this profile suggests a brand that may be out of touch with the times.
Given the changing retail landscape highlighted by economist Austan Goolsbee, which includes rising income inequality, a shift to purchasing at big box stores and online and a growing preference for services over goods, many retailers were going to find the coming years a challenge. The Great Lockdown seems destined to weed out the financially unfit sooner rather than later. And given the parlous state of the US retail scene in 2019, J. Crew and Nieman Marcus are likely just the first of many to throw in the towel and admit they have neither a good brand or a good balance sheet. But what do you think? Please share your thoughts.