Forever 21 closing stores in bankruptcy filing shows limits to fast fashion

Fast-fashion retailer Forever 21 filed for bankruptcy joining a growing list of brick-and-mortar companies that have seen sales hit by the rise of competition from online sellers like Amazon.com Inc and the changing fashion trends dictated by millennial shoppers.

Forever 21 Inc, the privately held company that helped popularize trendy and cheap clothing, has fallen out of favor with shoppers, in part due to other retailers like Sweden' H&M and Spain's Zara that churn out affordable styles similar to those recently seen on designer runways.

Younger, more environmentally conscious shoppers are also choosing brands that ethically source garments instead of retailers that use cheap fabrics to make T- shirts that are snapped up for $5. Resale sites like thredUp.com, which calls itself the largest online thrift store, are also growing in popularity.

Forever 21, which has 815 stores in 57 countries, said the restructuring will allow it to focus on the profitable core part of its operations and shut stores in some international locations.

It has requested court approval to close up to 178 U.S. stores outside of its major markets. On its website on Monday, Forever 21 sales included tops that started at $3 and dresses, handbags and jewelry and pants for $20 and under.

Gabriella Santaniello, founder of retail research firm A-Line Partners, said the

bankruptcy would likely create pressure on other clothing retailers as Forever 21 slashes prices to clear inventory.

She said the chain did little to differentiate itself from others.

"They used to have a bit of an older customer, but customers have become more conscious of where they spend their dollars. They want sustainability, they want to feel represented and I don't think Forever 21 particularly stood for any of this," she said.

Retail analysts said Forever 21's low prices and extremely large stores may also be a cause of its financial trouble. "Forever 21's large stores have been the key to their downfall. How can you have profitability on sales per square foot with these large stores," said Jane Hali, at research firm Jane Hali & Associates.Fast-fashion rivals H&M and Zara have never had stores as large as Forever 21 and Zara only has about 85 stores in the United States, she noted.

Founded in 1984 and headquartered in Los Angeles, Forever 21 said it will close most of its stores in Asia and Europe but would continue operations in Mexico and Latin America.Since the start of 2017, more than 20 U.S. retailers including Sears Holdings Corp and Toys 'R' Us have filed for bankruptcy as more customers shop online and eschew large malls.

Forever 21 also said on Sunday its Canadian subsidiary filed for bankruptcy and it plans to wind down the business, closing 44 stores in the country.

"Slimming down the operation and reducing costs is only one part of the battle. The long-term survival of Forever 21 relies on the chain creating a sustainable and differentiated brand," Saunders said.

Forever 21 lists both assets and liabilities in the range of $1 billion to $10 billion, according to the court filing in the U.S. Bankruptcy Court for the District of Delaware.

The retailer, which filed to reorganize under Chapter 11 bankruptcy protection, said it received $275 million in financing from its existing lenders, with JPMorgan Chase Bank NA as agent, and $75 million in new capital from TPG Sixth Street Partners and certain of its affiliated funds.

New York (CNN Business)As part of its restructuring after filing for bankruptcy last month, Forever 21 will close 200 stores, leaving the fast-fashion chain with a smaller footprint to help it emerge from Chapter 11.

Burdened by expensive store leases, unprofitable markets and continuing disruption from online shopping, the teenage clothing emporium became the latest casualty in a retail industry that is reeling from store closures and bankruptcies.

Now, the company's ability to land on its feet and keep its business going while in Chapter 11 is largely at the mercy of its landlords and vendors.

The ability to get out of leases and close stores at lower cost is a key advantage that the bankruptcy process affords retailers. Forever 21 leases almost all its retail stores it has 549 US stores and 251 in other countries, for a total of 12.2 million total square feet. Its annual occupancy cost is $450 million.

The company has significant support from its landlords with regard to lease structures both the ones it will be renegotiating to stay in, and others that it will exit said Jim Van Horn, a bankruptcy lawyer at Barnes & Thornburg LLP, who specializes in retail restructurings.

"That is not typically the norm for retail Chapter 11 bankruptcies," he said. "For those reasons, I do believe that there is a very good chance that Forever 21 will emerge from bankruptcy."

In the first half of 2019, more retail stores closed than in all of 2018, according to Coresight Research, making Forever 21 part of an industry trend facing many retailers.

Many Forever 21 stores are in malls, and the decline in mall foot traffic has led to a decrease in sales through what has traditionally been the company's predominant retail channel.

Despite the company's efforts to adjust its sales strategy to online sales, Forever 21 remains saddled with excessive floor space from leases entered a decade ago or more ago in unprofitable markets.

Yet many vendors continue to back the retailer. The company has entered into more than 130 vendor support agreements, providing crucial support for the company.

"That's a critical component of their ability to remain viable and to exit bankruptcy," said Philip Emma, a senior analyst at Debtwire. "This is the time of year where people are building inventories ahead of the holiday season, so to have this deal in place with vendors is critical to allow them breathing room to get through the fourth quarter."

Forever 21 can reject any contracts or leases as part of the Chapter 11 process. If a lease is below market value, landlords may welcome ending it to obtain more rent from a financially healthier company.

At the same time, exiting millions of square feet of retail space would put pressure on landlords, who would have to lease as quickly as possible.

"I have to imagine that that would generally speaking be detrimental to landlords," Van Horn said. It's a scenario no one wants to happen, he added which is why Forever 21 has been negotiating with its existing landlords to fashion the best win-win scenario possible.

One solution could be to give Forever 21's two biggest landlords, Simon Property Group Inc. (SIMON) and Brookfield Property Partners LP, a stake in the retail company.

"That could very well be a critical piece of the final resolutions with their landlords going forward," Van Horn said. "A sharing arrangement could be a very significant win-win outcome for both landlords and the company." Forever 21 plans to exit most international markets, including Canada, Europe, and Asia, emerging from bankruptcy as a leaner company focused on a smaller store base in the U.S., Mexico and Latin America.

"They will have a much lower cost structure overall, which will clearly help the bottom line," said Van Horn,and the remaining stores will likely generate a significantly higher profit than before, he said, leaving Forever 21 with a stronger liquidity structure and financing.

"Nobody can predict what's going to happen, but they should be on firm footing for at least two or three years," Van Horn said.

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