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Forever 21 Plans to File for Bankruptcy as Many Retailers Struggle – The Wall Street Journal

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Forever 21’s sales have slowed after a period of rapid growth and expansion.


Photo:

Michael Brochstein/SOPA Images/LightRocket/Getty Images

By

Soma Biswas,

Aisha Al-Muslim and

Alexander Gladstone

Teen retailer Forever 21 Inc. plans to file for bankruptcy as soon as Sunday, according to people familiar with the matter, as slow sales, online rivals and changing consumer habits take a rising toll on many bricks-and-mortar chains.

But in a statement, Forever 21 said it has no plans to file for bankruptcy on Sunday.

“Our stores are open and it is our intention to continue to operate the vast majority of U.S. stores, as well as a smaller amount of international stores, providing customers with great service and the curated assortment of merchandise that they love and expect from Forever 21,” it said. “Please visit our store locator to find the most up to date store list.”

Retailers closed more stores from January to June—more than 7,000—than they did in all of 2018, according to a report released Wednesday by consulting firm BDO USA LLP. Many companies were hurt by a lackluster 2018 holiday shopping season, BDO found.

“The headwinds for retail are gaining hurricane force,” said

Robert Feinstein,

a bankruptcy lawyer who represents creditors in major retail bankruptcies, including Payless ShoeSource Inc. and Gymboree Group Inc., both of which filed for bankruptcy protection this year.

Forever 21 expanded by opening large stores at a time when consumers, especially younger ones, were going online to shop. The closely held company has been facing a cash crunch and had been searching for a new loan for months, according to the people familiar with the matter. The chain is planning to shut down some of its more than 700 stores in bankruptcy, one of the people said.

Here’s the truth about the so-called, ‘retail apocalypse.’ It’s more of a transformation, WSJ news editor Lee Hawkins reports. Photo illustration: Emily B. Hager/The Wall Street Journal

Fears of a reckoning for traditional retailers have echoed through the industry for years as shoppers spend growing sums online and, in some cases, shy away from shopping malls. Many retailers are also grappling with an array of other problems, including excessive debt and overexpansion.

Some retailers have adapted more quickly to the challenge from

Amazon.com
Inc.

and cultural shifts around shopping.

Walmart
Inc.

’s second-quarter sales figures extended the company’s multiyear growth streak, and

Target
Corp.

said sales and profit rose in the second quarter, as investments in physical stores and online sales paid off.

Overall retail sales in the first six months of the year also remained solid because of a strong economy, low unemployment and rising wages.

But challenges abound. “The competition is fierce,”

Jeffrey Gennette,

the CEO of

Macy’s
Inc.,

said at a recent conference, adding that “retail is certainly not for the faint of heart.”

And many retailers are struggling. In the first half of 2019, 14 retailers with at least 20 stores filed for bankruptcy, including Payless, Gymboree and Charlotte Russe Holdings Corp., according to BDO. Since then, several other retailers—including Charming Charlie Holdings Inc., Barneys New York Inc., A’Gaci LLC and Avenue Stores LLC—filed for bankruptcy.

Many of those companies have closed stores, as have some other retailers. To reduce the expense of maintaining a physical presence, some retailers are dropping flagship stores and opting for smaller locations in prime urban areas.

In the first half of this year, about 19 retailers said they would together close more than 7,200 stores, according to BDO. The bankruptcies of Payless, Gymboree and Charlotte Russe alone led to the closure of about 3,700 stores, BDO said.

By comparison, there were fewer than 6,000 store closings announced last year, and about 6,600 in 2017, according to BDO.

Forever 21, founded in 1984, sells low-price apparel such as $5 tops and $20 dresses at stores in many states and foreign countries.

While other chains were shrinking stores and closing locations, Forever 21 went in the opposite direction. It expanded into stores that in some cases were double or triple the size of previous locations before it had the merchandise to fill them, according to people familiar with the company.

To help fill them, Forever 21 pushed into categories such as menswear, footwear, lingerie and plus sizes. The stores were still too cavernous, and the merchandise felt repetitive, according to former executives, customers and analysts.

The recent struggles prompted the company to enter into talks with its landlords about shrinking some of its bigger spaces and renegotiating leases, according to people familiar with the matter.

JPMorgan Chase

& Co., Forever 21’s most senior lender, has agreed to roll over its loan to the retailer into a new bankruptcy financing package, according to a person familiar with the matter.

Retailers were hurt by the 2018 holiday season, which failed to meet expectations, resulting in the weakest retail-sales performance since December 2009, according to BDO.

Bricks-and-mortar stores will continue to close at a high rate, according to BDO. “We’re going to see this trend continue,” said

David Berliner,

who leads BDO’s business restructuring and turnaround-services practice.

“If the economy does stumble a little bit, things can get painful,” Mr. Berliner said. “That can have a devastating effect on the weak retailers who can’t afford that sales dip in the holiday season.”

Marshal Cohen,

chief retail analyst at NPD Group, said that among the problems facing the industry is that the U.S. had too many stores per capita. “We don’t need as many stores as we have,” he said.

“Bankruptcies used to be a dirty word,” Mr. Cohen said. “Bankruptcies is a way to clean up your challenged business.”

—Peg Brickley
and Becky Yerak
contributed to this article.

Write to Soma Biswas at soma.biswas@wsj.com, Aisha Al-Muslim at aisha.al-muslim@wsj.com and Alexander Gladstone at alexander.gladstone@wsj.com

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