By Evan Clark and David Moin
with contributions from Kellie Ell, Sindhu Sundar
 on October 1, 2019
Forever21 in Times Square.

Forever 21’s bankruptcy crystalizes the end of a retail age — one that was characterized by an ever-expanding brick-and-mortar presence and ever-lower prices.

The fast-fashion company limped into bankruptcy late Sunday with too many stores that were too big, not enough of an e-commerce business and an international expansion that stretched its quick-turn supply chain to the limit.

Rather than embracing today’s main themes in retail — where sustainability, a smaller footprint, an emphasis on experience and strong brick-and-click connections rule — the L.A.-based company jumped at real estate opportunities in a rapidly shifting market, doubling down on old-world retail just as the consumer took a hard turn.

Now the retailer, which at its peak employed 43,000 people and logged $4.1 billion in annual sales and has long been known for its legal battles, plans to trim down and grow its web business — hoping to keep a family dream alive and adding a second chapter to a 35-year-old company that, for a time at least, successfully marketed itself as a kind of fountain of youth.

Forever 21 is a story about family and the ‘American Dream,’” said Jonathan Goulding, the retailer’s chief restructuring officer, in court filings. “In an age when retail, as most Americans know it, is under assault, Forever 21 intends to use these proceedings to remain viable and write a different ending from so many retail companies before it. The goal of these Chapter 11 cases is clear: emerge with a viable and feasible stand-alone business.”

First, the company is in for some pain. It plans to shutter up to 178 of its 549 U.S. locations and close most of its stores in Asia and Europe. All together, it has 251 doors abroad, operated by other companies or joint ventures.

And the turnaround won’t be easy.

As Craig Johnson of Customer Growth Partners put it, the company went from posting really solid growth to “breathing [its] own exhaust fumes.”

But in its own corner of fashion, Forever 21 was simply too big to let fail, at least easily. “The landlords have been carrying them,” Johnson said, noting the company also has good relationships with its suppliers in Asia. “For them to cut [Forever 21] off, it would be a huge part of their business.”

And as Forever 21 struggled, customers had good options to turn to, namely Zara and H&M.

“Currently Zara’s a hot brand, H&M is pretty good,” Johnson said. “Forever 21, which helped get things cranked up in fast fashion, fell by the wayside. There’s today brands, there’s tomorrow brands and there’s yesterday brands. Forever 21 went from being a today brand 10 years ago to a yesterday brand for the last three to four years.”

But the company stands a good chance of emerging from bankruptcy because its format remains viable to consumers and crucial to mall landlords anxious to save many of the stores, according to industry sources. Forever 21, in its heady global expansion, grew into more “mini-anchor” spots occupying upwards of 80,000 square feet in malls.

In essence, Forever 21 fell victim to a familiar trap in retailing — too many stores, too much square footage. Gap Inc.; Macy’s; Abercrombie & Fitch; Sears Holdings, Barnes & Noble; Bed, Bath & Beyond; J.C. Penney; Barneys New York; Limited; and Ascena Retail Group have undergone or are in the process of major streamlinings.

“Whether it’s arrogance or a false sense of hope, retailers have to plan more conservatively,” said William Susman, founder and managing director of Threadstone Advisors.

Forever21 in Times Square.

Forever 21 in Times Square.  George Chinsee/WWD

As Forever 21 rapidly expanded with bigger stores, including taking over several former Mervyn’s locations, mall traffic slowed, shoppers shifted to the Internet to shop, and there was rising competition from Amazon, Old Navy, Zara, H&M, T.J. Maxx and Target. “In the context of declining productivity in physical retail, expansion can be very costly,” Susman said.

One source said the company pays $20 million in rent at its 90,000-square-foot Times Square flagship in Manhattan and that the store only takes in about $30 million in annual volume. (A spokeswoman for the company said she could not confirm the rent at the location.)

But the path out of Chapter 11 won’t happen without landlords stepping in — and in a big way.

“Forever 21 is looking for substantial haircuts on the rent. I believe landlords will go for it,” said a real estate source. “Landlords don’t just want ownership. They want to control the business. They want transparency and accountability,” in exchange for reducing rents.

Real estate firms are starting to grow more comfortable operating retail, setting up a potential showdown. In 2016, for instance, Simon Property Group, and General Growth (now owned by Brookfield) worked with Authentic Brands Group to buy the Aéropostale chain out of bankruptcy.

Four landlords hold nearly 50 percent of Forever 21’s lease portfolio. The court documents don’t single out which four landlords those are, but Simon Property Group ranks as the company’s eighth-largest creditor, owed $8.1 million in rent, while Brookfield Properties ranks as 15th, owed $5.3 million. Macerich and Westfield are the next two landlords on the list of creditors, owed $2.7 million and $2.5 million, respectively.

The retailer said, “Although Forever 21 has not finalized the terms of a holistic landlord deal as of the petition date, Forever 21 anticipates that good-faith negotiations with its landlord constituency will continue post-petition, and that all parties will work together to reach a consensual, value-maximizing transaction.”

Herein lies the challenge. Owner/founders Do Won Chang and his wife Jin Sook are likely to put up a fight to maintain control. “They have an entrepreneurial mind-set. It won’t be easy,” said one real estate source. The owners could end up leaving the business, either willingly or not, requiring the new owners to seek new management.

The founders arrived in Los Angeles in 1981, just 22 years old and with no savings or education. He had three jobs, working as a janitor, a gas station attendant and a café worker, while she was a hairdresser. They eventually saved $11,000 and set off to realize their entrepreneurial ambitions.

“During his time as a gas station attendant, Mr. Chang took notice of the customers that drove the most luxurious cars — the customers working in the garment industry,” according to court papers. “This realization piqued Mr. Chang’s interest. He recognized that together with his wife, they were perfectly suited to enter the fashion industry. This would enable the couple to capitalize on Mr. Chang’s relationship-building prowess and Mrs. Chang’s keen sense of fashion.”

Their first store, a 900-square-foot door called “Fashion 21,” evolved into a multibillion dollar fashion empire that is still almost wholly owned by the Changs.

After the real estate market crashed in 2009, Forever 21 acquired locations from retailers such as Saks Fifth Avenue and set up shop in retail hot spots, including Manhattan, London’s Oxford Street, and Tokyo’s Shibuya District.

All told, between 2005 and 2015, Forever 21 opened more than 200 stores internationally, with more than 70 of them covering over 35,000 square feet.

“The large-format stores forced Forever 21 to create complicated assortment strategies and triggered inventory management challenges,” the company said. “The scale drove [a] new merchandise-sourcing strategy that greatly slowed ‘speed to market’ and increased risk generally.”

David Silverman, senior director at Fitch Ratings said, “It is from an execution standpoint a challenge to manage an increasingly diverse and far-flung business in terms of locations.”

Forever 21 also faced competition from more retailers that are using a least a part of its own playbook.

“Value-oriented fashion is something that consumers want,” Silverman said. “Many of the elements of fast fashion, the quicker turns, the internal manufacturing, replication of popular styles and quick replenishment as examples, are elements that are being copied or put into the strategies of larger companies. We’re seeing that along the mid-tier apparel space, from department stores to specialty names like the Gap and Old Navy. They’re, to some extent, over time ameliorating the competitive advantage that the traditional fast-fashion players have by taking some elements of that business model.”

To fight back, Forever 21 plans to use its stay in bankruptcy to position itself better online, ultimately boosting e-commerce up to 25 percent of sales from the current 16 percent.

“Forever 21 has a strong online presence that can be made even stronger with simple initiatives such as driving bottom line by increasing initial markups (Forever 21 currently sits well below market compared to comparable firms),” the firm said.

Other factors, including management and merchandise changes, appear to have contributed to Forever 21’s troubles before the filing. When one of the daughters of the founders (Linda Chang) took over the merchandising, things changed.

“She wanted to be a designer,” said one source close to the company. “The mother was a merchant, a buyer. She bought from vendors. Much of the success back then was because Forever 21 benefited from the rise of L.A. manufacturing. Being a Los Angeles-based company, Forever 21 could get goods fast. The company was relatively small and nimble and the stores had fresh goods. But things got complicated when it expanded to other countries.” Stores couldn’t get goods as fast and the fashion didn’t seem as fresh.

“The daughter wanted to design everything. That was the biggest problem,” said the source close to the company. The switch from purchasing market goods to designing goods wasn’t as successful as hoped.

At one time, the founders envisioned Forever 21, with its larger store formats, evolving into something of a department store with additional categories coming into the assortment. While some additional categories were added — such as its beauty format called Riley Rose — the strategy never fully rolled out as the health of the company waned. Real estate sources said many of the Forever 21 stores have aged but the capital just hasn’t been there for updating.

For vendors and lenders, the bankruptcy filing, although long expected, is still brutal.

Among the many debtors — the bankruptcy filing with a consolidated list of creditors runs 2,395 pages — four were owed more than $10 million. Among them: KNF International Co. in South Korea is owed $13.4 million; Philippines-based lender Praxton Commercial Corp. ($13.2 million); C&C Nantong Cathay Clothing Co. in China ($12.9 million), and Intec in South Korea ($10.4 million).

However, the company has asked the court for permission to pay some key vendors to keep goods flowing as the holiday season approaches.

The company owed about $350 million to vendors when it filed and has agreements with over 130 of its most-critical suppliers to pay over $240 million of what they’re owed in six weekly payments.

“In exchange for receipt of the six payments, the vendors agreed to continue supplying the debtors with merchandise and goods for six months as well as receive payment on forty-five day terms for all shipments after September 23,” Goulding wrote.

He said there are suppliers that rely on Forever 21 that “would likely face their own liquidity issues without a continuing, stable payment plan, and the consequences of their instability would ultimately be borne by the debtors.”

To sustain itself in bankruptcy, the company secured a $275 million debtor-in-possession loan, with J.P. Morgan Chase acting as administrative agent, as well as $75 million from TPG Sixth Street Partners.

While Forever 21 entered the bankruptcy with a hopeful message of reinvention, that’s to be expected.

“Post-bankruptcy, obtaining trade credit is very important, so it’s common for the debtor to be glowing and optimistic, because the debtor wants its vendors to give trade credit,” said Kenneth Rosen, who chairs Lowenstein Sandler LLP’s bankruptcy, financial reorganization and creditors’ rights practice. Rosen is not currently representing anyone in the Forever 21 case.

“When [you] read a first-day declaration that’s very upbeat, you have to remember who the audience is,” he said.

But in the coming weeks, vendors will get more insight into the retailer’s finances. The U.S. trustee in the case will appoint a committee representing the interests of some of the top unsecured creditors, including vendors. This committee, which will have considerable say in the process, will likely scrutinize the company’s finances and future plans including its store closure plan, performance in the markets it’s planning to say in, and profit margins for all its products, Rosen said.

Forever 21 and its vendors are just the latest to have to navigate the bankruptcy courts. Sears Holdings Corp., Barneys New York, David’s Bridal, Payless ShoeSource, Shopko and Charlotte Russe have all filed for Chapter 11 bankruptcy in the last year.

The question now is who’s next. There are plenty of retailers struggling with their balance sheets, although some still have time to sort out their finances.

According to Moody’s Investors Service, J.C. Penney Co. Inc., J. Crew Group, Neiman Marcus Group and Toms Shoes are all rated “CAA,” or below. That means the companies are “judged to be speculative of poor standing and are subject to very high credit risk” of not repaying debt.

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