J. Crew, the purveyor of preppy fashions and a stalwart in malls around the country, has filed for Chapter 11 bankruptcy. (Luxury vendor Neiman Marcus filed for bankruptcy protection a few days later. J.C. Penney’s bankruptcy is expected any day.)
News headlines announce that J. Crew is the first major retailer to fall as a result of the COVID-19 pandemic. Health experts tell us that those most susceptible to the virus are those with underlying conditions: lung problems, including asthma, heart disease, diabetes and obesity, weakened immune systems. The same is true of businesses. J. Crew carried $1.7 billion debt from a leveraged buyout by private-equity firms.
Private-equity firms are in the business of buying businesses and selling them. They typically have no interest in actually running the business other than what can be done quickly to attract buyers. A leveraged buyout is a purchase of a company with borrowed, i.e. other people’s, money. The purchased company is burdened with debt. To service the debt, new owners usually take measures to make the company operate more efficiently, which usually involves employee layoffs and/or selling off pieces of the business. With every deal made, whether it’s good or bad, the dealmakers pay themselves outsized fees for their genius in dealmaking.
Add to this the relentless long-term pressure from on-line retailers, even for luxury goods. The coronavirus was the final nudge, not the root cause. And somebody always makes money with a bankruptcy; ask the current resident of the White House.
For a fun dive into the leveraged-buyout frenzy of the 1980s, read “Barbarians at the Gate.” It tells the tale of the R.J. Reynolds/Nabisco fiasco and the parasites it attracted. HBO made a movie of it in1993 with James Garner.