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J. Crew Preps a Madewell IPO in a Threadbare Market

By Rich Duprey – Updated Sep 20, 2019 at 2:32PM

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Investors may get the blues as fashion retail stocks falter.

Privately held Chinos Holdings plans to spin off its Madewell premium denim chain, following the IPO of Levi Strauss (LEVI 1.32%) and the spinoff of Kontoor Brands (KTB 0.94%) from VF Corp.

But where the public debut of Madewell's rivals initially found favor with the markets, they haven't really fared well since, with their stocks down from the price they opened at. Many retail fashion stocks that also went public over the past year have stumbled badly, leading online used-clothing marketplace Poshmark to recently pull its planned IPO.

Chinos is operating from a position of weakness, with its flagship J. Crew brand teetering on the edge of bankruptcy due to substantial debt, which is listed as one of the risks of a Madewell offering. It suggests Chinos may not have many choices about the timing of the IPO. Coupled with an overall weak denim market, investors may want to wait a while to see if Madewell will make it.

Woman inspecting stack of jeans

Image source: Getty Images.

Madewell is doing well

The company does have a couple of advantages over its rivals. For example, where Levi Strauss relies heavily on the U.S. wholesale market -- one-third of its revenue comes from sales to department stores and the like -- the vast bulk of Madewell's revenue, some 87% in 2018, came from direct-to-consumer sales, whether from its e-commerce site or one of its 132 stores. The rest came from its five wholesale partners, Net-a-Porter, Nordstrom, Shopbop, Stitch Fix, and Zalando.

Where J. Crew has fallen sharply over the past few years, Madewell sales have grown at a healthy clip, rising from $248 million in 2014 to $614 million last year, for a 25% compound annual growth rate.

The denim shop has mostly found a niche with millennial consumers who are looking for the sweet spot of quality design at a reasonable price. That has allowed it to achieve comparable sales growth in 41 of the last 42 quarters. Much of the benefit, though, has come from the rise of casual wear,, where the blurring of lines between business attire and relaxed clothing has allowed jeans to be seen as acceptable in more settings. Denim accounted for 29% of revenue in 2018, while 52% represented "everything you wear with jeans."

Denim is not stretching

Yet the denim market may struggle. Global jeans sales rose 3.5% annually over the last decade, a rate slower than all other apparel, and Euromonitor International sees them getting weaker, growing at just 1% compounded annually between 2018 and 2023. 

One explanation is that while casual clothing like denim is more acceptable, athleisure styles from lululemon athletica and others remain the predominant casual attire in a work setting. Although Levi sales have risen, Kontoor Brands has seen them fall, hurt by the bankruptcy of Sears.

Another factor is the poor health of the retail market. Over 8,500 stores have already closed so far this year, compared with 5,800 for all of 2018. Coresight Research estimates as many as 12,000 stores will close in 2019.

Madewell does benefit from having many of its stores in upscale regional Class A malls, since much of the damage has taken place in Class B or C malls. And Madewell intends to open 10 to 15 stores per year for the foreseeable future.

A stitch in time

While Madewell's business is certainly better than J. Crew's, and it has staked out a space somewhat different and arguably better than either Levi Strauss or Wrangler parent Kontoor, life as a stand-alone public company may not be so easy. Plenty of other fashion retailers have found the public waters turbulent, and Madewell may get acid-washed as well.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Lululemon Athletica and Stitch Fix. The Motley Fool recommends Nordstrom. The Motley Fool has a disclosure policy.

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