Standard & Poor’s revised its outlook for J. Crew’s parent company, projecting the cash flow would remain “weak” in the “challenging macroeconomic environment” this year.
The debt watchdog cut its outlook on Chinos Intermediate 2 LLC to negative from stable and reaffirmed the company’s “B” credit rating. The move follows a similar adjustment by Moody’s Investors Service last month.
Under S&P’s scale, “B” rated companies are seen as having “the capacity to meet financial commitments” but are “vulnerable to adverse business, financial and economic conditions.”
The same could be said of many fashion retailers facing a glut of inventory in the market and consumers who are rattled by inflation.
While nowhere near as dramatic, the retailer faces continuing pressures, many of which are a legacy of COVID-19, which altered consumer habits, tied up supply chains and generally made life in retail harder.
S&P said it expects J. Crew’s “comparable sales trends to soften in 2023 as consumers become more selective with discretionary spending, in contrast with the growth trends after the economy reopened post-pandemic.”
The company saw a “significant free cash flow deficit” in the third quarter, which was mostly due to “inventory pull forward and higher freight costs amid supply chain disruption,” the rating agency said.
S&P said the firm’s adjusted leverage sat at about three-times, instead of the two-times projected.
“Reported EBITDA [earnings before interest, taxes, depreciation and amortization] margin decreased about 600 basis points to 7.6 percent in the third quarter due to increasing promotional activity across all brands and higher costs,” S&P said. “Despite supply chains stabilizing, we expect softening demand and elevated inventory levels to lead to increased competition and weaker operating margins. High inflation levels and mixed merchandise execution could pressure margins further.”
This year, S&P projected that J. Crew’s “working capital will return to normal levels but cash flow will remain weak.”
“We expect higher capital expenditure in 2023 as the company continues to explore growth opportunities,” the rating agency said. “Since the beginning of the last year, the company started to add new stores to its fleet with a strategic focus on value-oriented consumers, and we remain cautious about this approach.”
J. Crew’s sales tallied about $2.6 billion for the 12 months ended Oct. 29, which is also the end of the firm’s third quarter.