• by Sarah Mahoney  @mahoney_sarah, June 15, 2017

The outlook for J. Crew, once the golden child of specialty retailers, keeps getting worse. Besides poor results and the news that Millard “Mickey” Drexler would step down as CEO, the latest is that S&P Global Ratings has downgraded the company, classing J. Crew’s latest debt restructuring move as “distressed.”

While a group of Crew’s creditors has agreed to the restructuring, the ratings group says it is lowering the Crew’s corporate credit rating. "We view the transaction as distressed because the participating note holders will receive significantly less than par value," writes Helena Song, S&P Global Ratings credit analyst. And once the transactions are completed, which is expected in mid-July, it says it expects lower the corporate credit rating to “Selective default.”

S&P’s ratings change comes on the heels of J. Crew’s recent announcement that its quarterly revenues dipped 6% to $532 million, with J. Crew same-store sales dropping 12% to $428.5 million. (That follows a decline of 8% in the first quarter of last year.) 

And it appointed West Elm’s James Brett as new CEO, replacing Drexler, who continues as chairman. The news took many in the industry by surprise: Drexler, who helmed the Gap during its high-flying years, is considered one of the most innovative retailers in the business. And under his guidance, J. Crew flourished, going public in 2006, and—catering to its sophisticated-prep audience—peaking in growth around 2012.

But observers aren’t holding out much hope. “Recent management changes appear to be little more than rearranging deck chairs on the Titanic,” writes Neil Saunders, managing director of GlobalData Retail, in his recent report on the company.

He contends that one of the retailer’s biggest problem is the lingering perception that its clothes aren’t worth the money: “Many consumers still see the full price offer as bad value for money,” leading to extensive discounting, and explaining why its factory stores continue to do well.

There have also been complaints from customers that quality has declined, and the departure of creative director Jenna Lyons earlier this year signals a still-uncertain fashion path.

“Overall, J Crew is a business that appears to be financially broken, mostly thanks to its high debts,” adds Saunders. “The brand is not completely dead... and now needs a team that can rekindle many of the things that once underpinned its success. This is a task that needs to be tackled with the utmost urgency.”