Jill Acquisition LLC Outlook Revised To Stable From Negative On Better-Than-Expected Performance; Ratings Affirmed

  • U.S.-based specialty apparel retailer J. Jill Inc. (Jill) has reported a gradual recovery in operating performance and credit metrics better than our previous forecast.
  • On March 14, 2019, S&P Global Ratings revised its outlook on Jill Acquisition LLC, the borrowing subsidiary of Jill, to stable from negative and affirmed the 'B' issuer credit rating. At the same time, we affirmed our 'B' issue-level on the senior secured term loan facility. The recovery rating on this debt remains '3'.
  • The stable outlook reflects our expectation for relatively steady credit metrics over the next 12 months, reflecting a slight decline in EBITDA on higher, planned selling, general, and administrative (SG&A) investments on information technology (IT), partially offset by modest revenue growth.
NEW YORK (S&P Global Ratings) March 14, 2019--S&P Global Ratings today took 
the rating actions listed above. The outlook revision reflects improved 
operating trends in the second half of fiscal 2018, following weak results in 
the first half, resulting in stabilizing credit metrics that are better than 
our previous forecast, including funds from operations (FFO) to debt of about 
20%. Jill experienced a merchandise misstep in late fiscal 2017 and functional 
issues with its new website that launched in early 2018 that contributed to 
heavier promotional activity and poor e-commerce customer experience. However, 
towards the back half of fiscal 2018, performance stabilized as Jill cleared 
aged inventory. Based on a meaningful reduction in promotional cadence, as 
reflected through sequential improvement in gross margin during the second 
half of fiscal 2018 (margin decline for the full year fell to about 130 basis 
points from about 300 basis points in the first half), we believe the company 
executed well on delivering a product assortment that resonated with its 
customer base.

The stable outlook reflects our expectation for relatively steady credit 
metrics over the next 12 months, reflecting a slight decline in EBITDA on 
higher investments in IT initiatives offsetting continued modest revenue 
growth. The stable outlook also incorporates our view that the company will 
generate modestly positive free operating cash flow and maintain adequate 
sources of liquidity. This incorporates our expectations that the company will 
refinance its currently undrawn asset-based lending (ABL) revolver facility, 
maturing in May 2020, in a timely fashion.

We could lower the rating if the company meaningfully underperforms our 
expectations, such that FFO to debt approaches the mid-teens percentage area 
and FCC ratio drops below 2.0x. This scenario would be driven by soft revenue 
trends, including consolidated comparable sales decline in the 
low-single-digit percentage area, possibly due to a weakening of the brand's 
appeal on increased competitive pressures or merchandise missteps, resulting 
in a 300 basis point margin contraction beyond our base-case projection. We 
could also lower the rating if the company's performance deteriorates, such 
that our cash flow projections weaken, and the company fails to address its 
ABL revolver maturity in a timely manner, prompting us to reassess the 
company's liquidity.

Although unlikely in the near term, we could raise the rating if the company 
meaningfully broadens its scale of operations, while maintaining or improving 
profitability, such that we have a more favorable view of the company's 
competitive standing. This scenario would include an expansion of the 
company's portfolio to include multiple good performing brands, catering to a 
diverse customer base, leading to a significant growth in the company's 
revenues and cash flow. We could also consider raising the rating if we expect 
a reduction in private equity sponsor ownership to under 40%, accompanied by 
modest improvement in operating trends relative to our base case. Under this 
scenario, we would have a more favorable view of the company's financial 
policy.