Forever 21: Next Retailer to Go Bust?
A Bankruptcy May Be in Forever 21’s Future, But the Chain Will Survive, Experts Say
The fast-fashion retailer is in discussions to raise debtor-in-possession financing. It may have to restructure and close stores.
Liz Wolf | Jun 12, 2019
Struggling Forever 21 is reportedly eyeing significant turnaround plans.
Faced with diminishing mall traffic and falling sales due to competition from other affordable apparel retailers and trendy online fashion brands, the fast-fashion retailer is exploring a restructuring, Bloomberg reported last week.
Forever 21 is reportedly in discussions with private equity firm Apollo Global Management, “considering raising debtor-in-possession funds to provide financing should it plan to file for bankruptcy.”
The chain is exploring options that would “shore up its liquidity and allow its founder Do Won Chang to maintain control,” according to Bloomberg.
However, that strategy poses some questions from industry experts.
“I don’t know how you can do both,” says long-time retail consultant Jeff Green, who recently rolled his firm, Jeff Green Partners, into Hoffman Strategy Group. The Lincoln, Neb.-based boutique commercial real estate advisory firm specializes in retail and mixed use. “Anybody who’s going to put money into Forever 21 is going to want a certain amount of control, especially when they’ve made some bad decisions. I don’t see why any venture capital would even consider not putting in some of their own people. That might be the goal, but it’s not a realistic one.”
Neither officials from Forever 21 nor Apollo Global could be reached for comment.
Los Angeles-based Forever 21, which operates about 715 stores globally, made a name for itself as a store for younger customers seeking trendy clothes at reasonable prices. The family-owned chain opened its first store in Los Angeles in 1984. For a while, Forever 21 was hailed as a leading U.S.-born fast-fashion retailer, overtaking the mall-focused brands of the 90s to deliver popular collections in large-format stores “typical of the European fast-fashion establishment,” says James Taylor, retail expert at PA Consulting, an innovation and transformation consultancy.
Fast-fashion giants like Forever 21 and Swedish retailer H&M disrupted the specialty apparel sector by mimicking runway fashions at cheaper prices, and generally, beating other retailers to the market.
“[Forever 21’s] rise of relevance through speed against a slower fashion sector in the U.S. fueled its global expansion to take on the Primarks and H&Ms during what could be viewed as the growing up of fast fashion during the 2000s,” Taylor notes. (Primark is an Irish fast-fashion retailer).
Competition heats up
Fast fashion has become a competitive business. Forever 21 faces rivals like H&M and Spanish clothing retailer Zara, as well as online retail brands like Fashion Nova—which has more than 15 million Instagram followers—and Lulus with 1.3 million Instagram followers. Social media and the use of celebrity endorsements are now marketing clothing, Taylor notes.
He adds, “Even faster, fast-fashion players that are online-centric—ASOS, Missguided, Shein, Oh Polly, Nasty Gal—are cutting down supply chains to bring out offerings in as little as a week.”
Also, there are online rental and resale brands adding more competition.
“Rental and resale options are growing and providing new ways to shop,” Taylor notes. “Rent the Runway, Stitch Fix, Wear the Walk are currently taking consumers away from physical stores, but may have their own stores in the future.”
Forever 21 has been opening big-box stores and expanding into new cities when many competitors were pulling back on expansion plans. However, its international stores in particular have been a “drag on business,” Bloomberg reported.
Being private, Forever 21 does not disclose its financials and it’s tough to find information on its real estate strategy. However, there have been reports of struggles in recent years. The chain is pulling out of China and shuttered some other international locations.
Teen apparel retailers have been hit particularly hard during the retail apocalypse. Several teen clothing stores have filed for bankruptcy in recent years, including Aeropostale, Wet Seal, American Apparel and Rue21.
Did fast-fashion sector grow too fast?
Fast fashion in general, including retailers like Forever 21 and H&M, has over-expanded, Green says. He says Forever 21, specifically, opened stores in many class-A malls and then went into B and C malls. He says the retailer is in some markets that really aren’t large enough to support its stores. They lack the population to make a store work, he says.
However, Forever 21 likely negotiated some sweetheart deals in those lower-class malls.
“I’m sure they’re not paying much rent,” Green says. “Landlords and mall developers want them to come in so that they can use up some of the small-shop space, and they use it to entice other retailers to come in.”
“But I always say no matter what deal you get to go in, you still have to generate sales,” he notes.
Green estimates that on a sales per-square-foot basis, Forever 21 was likely averaging $135 to $165 a foot early in its rollout, and is now averaging less than $100 a foot.
“That’s because they’ve opened in B and C locations,” he says. “Anything under 100 bucks a foot is scary. To me, that’s J.C. Penney and Sears territory.”
Other ‘mistakes along the way’
Forever 21 made some other mistakes along the way, according to Green. Before the Great Recession, it was a small accessory shop. Then it made a big expansion move by taking over massive department store spaces vacated by bankrupt retailers Mervyn’s and Gottschalks.
Those spaces were too big. “When they took over the old Gottschalks in California, they walked into 80,000-sq-ft. locations,” Green says. “They didn’t have enough merchandise to fill it, so it looked like it was a distressed retailer.”
The same thing happened with Mervyn’s stores; many were 80,000 sq. ft. No fast-fashion retailer can fill that much space, in Green’s view. “I can’t think of any markets where Forever 21 could support an 80,000-sq.-ft. store,” he notes. “Yeah, they put in their typical Forever 21 and Forever 21 Men and Forever 21 Kids, but still there’s no way you can generate enough sales in those boxes.”
While store expansions signal growth, it appears that Forever 21 hasn’t kept on top of the trends driving the larger retail industry, by tending to focus more on offline than online, and not generating perceptions of overall quality and sustainability, adds Taylor.
“Consumers are looking for longevity from garments—with a focus on sustainability,” he notes. “Retailers are responding with new ranges and initiatives, such as in-store recycling schemes.”
Taylor says that while Forever 21 employs various sustainable initiatives, it doesn’t market them in the same way as H&M, for example.
What does the future hold for the retailer?
Forever 21 will eventually need to close stores, Green says. It’s still a viable concept, but needs to be a smaller chain in his view. It would do well to get out of those very large boxes and focus on roughly 20,000-sq.-ft. stores, as well as vacating the struggling, class-C malls. Green notes, however, that the retailers’ leases in class-C locations are relatively new and are likely five- to 10-year deals.
“They may have to go into Chapter 11, but I do believe the concept is still good,” Green notes. “Downsizing the chain is the direction they need to go. I don’t believe they would go into Chapter 7 liquidation.”
While Chapter 11 is not great for landlords, Green adds, it’s a good way to take a step back to reposition the chain. “To me, that wouldn’t necessarily be a bad thing.”
Will a restructuring work?
“A preferential debt restructuring could certainly help to achieve a more balanced capital cost structure against Forever 21’s low-cost production and pricing business model,” Taylor notes. “Especially as it looks to invest in its expansion plans by taking on increasing debt.”
The fast-fashion sector continues to post growth figures, according to market reports.
“In general, fast fashion will likely remain a key and dominant part of the industry’s dynamics, as consumers continue to seek inspiration for new and up-to-date styles from an ever-increasing set of social and digital touch points.,” Taylor says.
However, the sector is changing and there’s instability.
“Given the flux state we see the fast-fashion sector to be in, the restructuring could help to align Forever 21’s strategy with the sector’s evolution and potentially explore the growth areas found within online,” he notes.
A pullback by Forever 21 could add to pressure on retail landlords, who are already reeling from thousands of recent vacancies caused by bankruptcies and liquidations that have left shopping centers and Main Streets pocked with empty storefronts.
Macerich Co., Taubman Centers Inc., Simon Property Group Inc. and the Pennsylvania Real Estate Investment Trust are some of the landlords that count the retailer among their tenants, according to filings.
The ailing chain is looking for more financing to shore up liquidity while allowing founder Do Won Chang to stay in control, Bloomberg previously reported. The company has also talked to Apollo Global Management LLC about lining up debtor-in-possession financing in case Forever 21 decides to file for bankruptcy.
Forever 21 opened its first store in 1984 as Fashion 21, according to its website. It expanded even as new competitors, some online only, entered its affordable fashion space.
The company carries about $500 million of debt in the form of a first-lien asset-based revolver that matures in 2022, according to data compiled by Bloomberg.