By  on February 17, 2005

NEW YORK — Forever 21, which has been on an expansion spree, is buying bankrupt Gadzooks Inc. for $33 million.

The announcement is expected today. Terms of the deal are still being finalized, according to sources. Essentially, the $33 million purchase price consists of $23 million in cash, a note payable in five years and the assumption of certain liabilities. The parties were expected to sign the deal late Wednesday.

Forever 21, which gets 243 Gadzooks store locations in the transaction, also agreed to keep at least 150 sites. However, it was unclear at press time whether Forever 21 will immediately convert the 150 store sites to its nameplate brand or whether it will continue to operate them initially under the Gadzooks name before deciding its future.

The status of the remaining 93 Gadzooks sites is unclear. Sources said Forever 21 is likely to close at least some of the unwanted locations. Last month, real estate contacts pinpointed about 40 store locations that Gadzooks was looking to close, but this was before Forever 21 entered the picture. The final disposition of those stores could also depend on whether Forever 21 decides to keep the Gadzooks nameplate. Neither retailer could be reached for comment.

Gadzooks filed for Chapter 11 a year ago in Dallas and was expected to restructure. Last month, however, the retailer’s reorganization plan was withdrawn when investors backing the plan pulled out of a financing agreement. The change of heart followed the teen retailer’s report of a 3.7 percent decline in same-store sales for December.

The assets — 243 store leases in 40 states, $25 million in store inventory, and a leased 205,000-square-foot headquarters and distribution center — were put up for sale late last month, giving potential bidders only three weeks to complete their due diligence.

One financial source said there were three qualified bidders. One was interested in just the store locations, which eventually drove up the price tag on the bankrupt chain. The auction took place on Tuesday.

Sam Stricklin of Bracewell & Patterson in Dallas, the law firm that represents the unsecured creditors committee in the Gadzooks bankruptcy, described the auction as “spirited,” but declined to provide specifics, such as the identity of the other bidders.A hearing on the result of the auction before U.S. Bankruptcy Court Judge Harlin De Wayne Hale in Dallas is scheduled for Wednesday at 9 a.m. According to Stricklin, there is every expectation that the bankruptcy court “will approve” the deal.

“We expect great success for Forever 21,” observed Michael O’Hara, managing director at Financo Inc. Financo is Gadzooks’ financial adviser. O’Hara declined to provide specifics about the auction, but praised the bidders for their ability to complete the due diligence process in what he described as a “compressed time period.” He also declined to identify the other bidders, but said they were “ongoing concerns.”

Forever 21 is one of the fastest-growing teen retailers in the country. It began as a 900-square-foot shop on Figueroa Street in Los Angeles in April 1984. Back then it was known as Fashion 21. According to the company Web site, sales had grown from $35,000 to $700,000 by the end of the first year. New stores began opening every six months, and the name was changed to Forever 21.

The first Forever 21 mall store was opened in 1989 in Panorama Mall, Panorama City, Calif. Along with the first mall store was an expansion to an average square footage of 5,000 feet per store. The first store outside of California was opened in 1995 in the Mall of Americas in Miami, Fla., and by 1997 the chain numbered 40 stores. By 1999, the average square footage of the stores had expanded to 9,000 feet.

Forever 21 operates two concepts, its core Forever 21 stores that number more than 145 locations and several Forever XXI stores that feature venues of 24,000 square feet. The XXI stores are located in Texas, Miami, Los Angeles, Chicago and Edmonton, Canada.

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