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The End of 2015 Was Really Ugly for J. Crew

This post originally appeared on Business Insider.

J. Crew is falling apart, and it’s only getting worse.

According to Bloomberg, the private-equity firm TPG Capital sliced its holdings in the business by a whopping 84 percent when 2015 came to a close.

Bloomberg obtained documents revealing that TPG’s $478.6 million equity stake had fallen to a jarringly low $76 million. Even worse, Bloomberg notes, the parent company J. Crew Inc. has a whopping $2.1 billion in debt.

But none of this should be too surprising to anyone following J. Crew’s continual tumble. The apparel company has been reporting dismal results for years.

This almost seems par for the course given the current retail climate. Malls are struggling, and younger generations’ obsession with social media has rendered durable, long-lasting, expensive apparel insignificant; they want edgy fast-fashion clothes they can share online immediately.

“Their entire life, if it’s not shareable, it didn’t happen,” Marcie Merriman, Generation Z expert and executive director of growth strategy and retail innovation at Ernst & Young, told Business of Fashion. “Experiences define them much more than the products that they buy.”

Additionally, consumers see apparel on Instagram and want it instantly, which is a death knell for traditional retailers like Gap and J. Crew, which have longer lead times between designing apparel and putting it on the shelves.

“You’re dealing with a company in a segment that has to really adapt well, and if you have enormous leverage on the balance sheet, that becomes very, very difficult,” David Tawil, president of Maglan Capital, told Business Insider. “You can’t invest in the way that a more nimble player can.”

But J. Crew’s troubles run even deeper.

As a result of failing to sell clothing at full price, J. Crew has had to resort to a strategy that retail expert Robin Lewis of The Robin Report has said will ultimately become an “economic black hole”: excessive discounting. J. Crew has become synonymous with discounts, and while that’s fun for the consumer, it’s terrible for the business.

In the fall, the company appeared to be getting back to its roots, but it appears that even the company’s signature blazers cannot save the ailing retailer; it will take a lot more than that, and it will take a while.

“This does not happen overnight,” CEO Mickey Drexler stressed on last quarter’s earning call, before ending abruptly without answering any questions.

So what’s next for J. Crew amid the recent financial troubles?

If the market doesn’t improve, Tawil believes that “they’re going to be a big balance sheet restructuring that’s going to have to happen.”

“Management will continue to search for some sort of Hail Mary, but absent some lightbulb moment or a huge about-face in the trajectory of retail in this country … there’s not going to be a save,” he said.

That doesn’t mean J. Crew will die tomorrow—it just might be more of a slow, unfortunate burn.

“Clearly the company has more runway at this point in terms of existence,” Tawil said. “There’s nothing that’s going to make it go bankrupt tomorrow. The value erosion will continue [and] management has no incentive to cut this short. They want to continue to have their jobs, [so] they’ll pay themselves a salary. They’ll continue to search for some sort of turnaround.”

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