LOS ANGELES — Don Chang is plotting a dramatic expansion for Forever 21.
This story first appeared in the June 30, 2014 issue of WWD. Subscribe Today.
The founder and chief executive officer of the fast-fashion chain, based here, told WWD his “ultimate goal is to double the size of our company within the next three years,” giving it a footprint of 1,200 doors globally.
And the company’s newest concept, F21 Red, could be key to that ambitious plan. Last month, Forever 21 launched the banner at the Azalea Shopping Center in South Gate, Calif., a working-class community about 20 miles south of here.
The 18,000-square-foot store targets a value-oriented customer with a deeper selection of the Forever 21’s core items at seemingly sharper price points. The move surprised many analysts and retail experts, who questioned how the company would make its margins on $1.80 camisoles, $3.80 tank tops, $4.80 bikinis and denim starting at $7.80.
“Are they doing this as a loss leader to take market share and trade the girl up, or are they that big and have such buying power that they can work on such razor-thin margins?” asked Liz Pierce, senior research analyst at Ascendiant Capital Markets.
The answer might be both. Chang — who is known for being famously tight-lipped on the company’s plans — said the price points at F21 Red are actually the same as those at Forever 21. It’s a wider assortment that is the secret sauce for the concept.
“We are able to buy a deep volume of product, increasing our economies of scale while cutting our margins, so that we can pass the savings on to our customers,” Chang said.
The company’s seemingly razor-thin margins have led many to speculate about how its styles are produced. The retailer, which does not own any of its own factories, has come under fire in the past for working conditions at the plants that make its goods. Most recently, it has been criticized for not signing the union-driven Bangladesh Accord on Fire and Building Safety, one of two retail agreements enacted after more than 1,100 workers died in the collapse of the Rana Plaza Factory building in Bangladesh last year.
More than 160 companies, mainly from Europe, have signed on to the accord, which, among other things, requires safety inspections at the country’s garment factories. Many other major U.S. retailers, including Gap Inc., Macy’s Inc. and Target Corp., have alternatively joined the Alliance for Bangladesh Worker Safety.
Forever 21 has opted to address the issue through its own policies.
“Since 2007, Forever 21 has developed a vendor agreement, requiring that manufacturing facilities with which we do business adhere to the highest level of safety and human rights standards,” Chang said when asked why Forever 21 has not signed the Accord. “We have a strict vetting process when we first start business with new vendors, and this includes visits to, and review of, the factories and the workforce.”
Forever 21 is something of a lightning rod and has been sued repeatedly by competing brands for alleged trademark violations. And in January, the U.S. Department of Labor’s Occupational Safety and Health Administration cited the company for exposing employees to safety hazards at its stores in Paramus, N.J., and Manhattan, including obstructed exit routes and fluorescent lights with no covers.
But the company has continued to grow.
Chang is focused on keeping that expansion going and indicated that more F21 Red stores are likely coming down the pike and that the retailer “would be releasing more information in the coming months.”
The new concept could prove vital to the retailer’s expansion, said Jeff Van Sinderen, senior analyst at B. Riley & Co.
“Three years is an aggressive expansion, especially with the environment we’re in today,” Van Sinderen said. “I don’t think they get there with comping [increasing sales at stores open a year or more] only. They’ll have to add a lot more stores, and maybe they’re looking at F21 Red for that. It’s feasible but will require very aggressive action and same-store sales to be steadily positive.”
The privately held company does not publicly release same-store sales figures or financial data, but has clearly been taking market share and now has 469 doors in the U.S. and another 131 internationally.
Chang launched the retailer in 1984 with a 900-square-foot space on Figueroa Street in downtown Los Angeles under the name Fashion 21. That first store logged sales of $700,000 by year’s end and led to more doors. Renamed Forever 21, the company now operates 469 doors in the U.S. and another 131 in international markets, including Canada, China, Europe, Hong Kong, India, Israel, Japan, Korea, Latin America, the Philippines and the U.K.
“Consumers are more informed and choosing more carefully than ever before. To survive in this business, you must constantly evolve,” Chang said. “We listen to our customers and implement change immediately to better serve them.”
The ceo said F21 Red is a response to customer demand.
“We noticed that many of our customers were asking for a wider selection of our basics and staple items, and felt that the time was right to offer deeper inventory of options,” he said.
The concept speaks volumes about the current health of the sector, according to Van Sinderen.
“We’re in an environment that’s very challenging to apparel and certainly for junior and contemporary,” Van Sinderen said. “Frankly, there is a consumer that is getting squeezed right now by a higher cost of living, a higher cost of food…and arguably, a higher cost of health care. They need merchandise that’s accessible, especially when it comes to basics.”
Indeed, it’s been a challenging time for juniors retailers, which have struggled with dwindling sales due to online retailing behemoths and brands that employ aggressive omnichannel marketing strategies, including targeting consumers through online and mobile efforts.
“I don’t think that the health of the [junior apparel business] is great,” said Pierce at Ascendiant Capital Markets. “Even though April seems better, I’m reluctant to extrapolate April too far forward.”
Pierce and Van Sinderen said there is a dearth of compelling merchandise and macro trends driving sales in the junior and contemporary market.
But despite the chilly market conditions, Forever 21’s business continues to grow hotter.
“Forever 21 is still the leader in lower-price-point fast fashion,” Van Sinderen said. “H&M has more of a European flavor and what I would call ‘modern basics,’ and Zara is operating at a higher price point.”
With such a small group of such retailers in the market, the sector seems potentially poised for new players. But Chang is determined to fill any gaps in the sector before someone else does.
“Where there is demand, there is room for more players,” Chang said. “We focus on identifying the room in the marketplace and, when plausible, filling it, as quickly as possible.”