Why Forever 21 Filed for Bankruptcy

by Diana Drake

YouTubers love Forever 21. Take, for instance, Kayleigh Noelle, a beauty and fashion vlogger with nearly 700,000 subscribers. This spring, she posted her Forever 21 Try On Haul video, gushing, “Forever 21 is super affordable and some pieces I still have in my closet from many seasons ago. I am and have been a huge fan of their clothing for years.”

Kayleigh and lots of other tweens, teens and twenty-somethings are wearing their fave Forever 21 faux suede crop tops and high-rise skinny jeans this week in tribute to the troubled retailer, which just announced that it has filed for Chapter 11 bankruptcy protection. In a statement Linda Chang, the company’s executive vice president, said, “This was an important and necessary step to secure the future of our company.”

The good news for deal-loving fashionistas who are headed to the mall: Forever 21 is not going away – at least, not yet. But the well-known retail store is making changes.

Here are some details to help decipher the business behind the Forever 21 bankruptcy:

The Next Chapter. In announcing its Chapter 11 bankruptcy, California-based Forever 21 said that it might close up to 350 stores globally and 178 U.S. stores, including several in its home state. Florida, New York and Texas can expect several store closings, as well. The company also plans to keep operations in Mexico and Latin America, and shut down stores in Asia and Europe, claiming that it wants to maximize the “value of our U.S. footprint” and shutter certain international locations. Bankruptcy, which is when a person or company cannot repay the debt owed to creditors, can take different forms. While a Chapter 7 bankruptcy calls for a company to liquidate all its assets and close down, a Chapter 11 bankruptcy allows a company to reorganize under the protection of bankruptcy court. It’s a second chance at success. Michael D. Sirota, a bankruptcy lawyer with Cole Schotz in Hackensack, N.J., told KWHS, “Chapter 11 is a period of time for an entity to get and take a breathing spell from the pressures of its creditors. During that breathing spell, the company hopes to restructure its financial affairs and balance sheet to emerge a stronger and more well-balanced company.”

But, why? Forever 21, around since 1984, is a major player in what’s known as fast fashion, clothing designs that move quickly from concept to mainstream retail stores and must often predict the latest fashion trends. Merchandise in the stores also turns over quickly, with new displays every few weeks. Zara is a well-known brand in the fast-fashion space. This business model, however, likely contributed to Forever 21’s financial troubles. “There is a growing trend toward sustainability, which leads consumers to rent clothing, or share clothing – and Forever 21’s model is fast fashion, which is not built to last. It is less in keeping with a sustainability model,” notes Barbara Kahn, a Wharton marketing professor. “Also predicting [trends] like that, especially for young women, is always difficult.” Kahn adds that the U.S. retail market has been “overstored” for a while, especially as online shopping has hit its stride. Forever 21 “overbuilt stores up until 2016 apparently, just when the retail apocalypse was starting and consumers were increasingly shopping online,” she points out.

Retail Apocalypse? The retail industry has been experiencing a shakeout in the past few years, losing all or significant chunks of big brands, such as Sears, Toys ‘R’ Us, Gymboree, Claire’s and Charming Charlie. “We have had too many physical stores, so we were probably going to see more stores close regardless of any other factors – and indeed Forever 21 probably overexpanded, as Gap did earlier,” notes Kahn. “Many legacy retailers have not been keeping up with changing consumer tastes and shopping patterns. They have been resting on old models and ways of doing things.” Creative retailers, like Amazon Go stores, have found ways to integrate their physical and online experiences to meet consumers’ shopping needs. Smart retailers, Kahn has said, know when and where to open and close brick-and-mortar locations.

A New Normal. The company has stressed that people who come into its stores (at least those that remain open) will have a shopping experience that “will continue to feel like a normal day.” Still, the retailer’s protection under U.S. bankruptcy court is proof that it is struggling financially. The company reports that it has secured $350 million in financing, including $275 million from investment banker JPMorgan Chase. An additional $75 million in new capital from TPG Sixth Street Partners, a finance and investment firm, will reportedly enable Forever 21 to take care of business, like processing gift cards and reimbursements. “The financing provided by JPMorgan and TPG Sixth Street Partners will arm Forever 21 with the capital necessary to effect critical changes in the U.S. and abroad to revitalize our brand and fuel our growth, allowing us to meet our ongoing obligations to customers, vendors and employees,” said Forever 21’s Chang.

Mall Fallout. Forever 21, which currently has a total of 549 U.S. stores, will continue to operate hundreds of stores, many of which are major tenants in malls across America. The company invested heavily in the mall model, at one point operating stores in some 800 locations. Malls will undoubtedly feel the pain of Forever 21 store closures, especially heading into the holiday retail season. “Many of the Forever 21 stores are big stores, not quite the anchor roles of the department stores, but nearly so. When they close, foot traffic to malls will likely decrease, which may indeed cause other mall stores to close,” suggests Kahn.

Moving forward, the shoppers and analysts will be watching to see if Forever 21 is able to reorganize its business over the next several months and emerge successfully from Chapter 11 bankruptcy “as a stronger, more competitive enterprise that is better positioned to prosper for years to come.”

In the meantime, experts recommend that you spend your Forever 21 gift cards ASAP, just in case. More than 17 million gift cards were left unswiped when Borders liquidated its stores in September 2011. That $210.5 million disappeared, along with the books.

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Conversation Starters

What is Chapter 11 bankruptcy?

What factors contributed to Forever 21’s financial woes?

How do you feel about Forever 21’s “fast fashion” business model? Do you think the sustainability trend is real and here to stay, or will young shoppers follow more traditional fashion and deals?

4 comments on “Why Forever 21 Filed for Bankruptcy

  1. I still think physical stores have their irreplaceable superiority to online stores especially for clothing markets. Photos & videos only show the colors, shapes & prices of the products, which are important factors but not the critical ones of the items to be bought. The comfort level & the whole style of your clothing really matter. Everybody is able to compare all he/she wants and has a clear idea. Therefore, in my opinion, physical stores are not completely inferior to online stores.

  2. Forever 21 is a retail store that puts emphasis into clothing ever since The 1980s. Just like most retails today, some have been going bankrupt or have already closed down. Forever 21 announced that they were going bankrupt due to investing money into expanding more locations to the point where they’re dealing with financial problems. Personally speaking I have a comparison between this store and K-Mart. I believe K-Mart had also wanted to expand around the late 90s and early 2000s however K-Mart didn’t put focus into updating the company’s technology and store in general which resulted in today, where most of the locations are being shut down. I don’t think Forever 21 will be experiencing the same fate K-Mart, but I believe competition and online shopping is whats causing this to happen for them. Similar outcomes are the result of most locations being closed. Personally, I hope Forever 21 can get back on track, because I really enjoy shopping there.

  3. There’s no denying that Forever 21 is one of the biggest fast fashion distributors of our generation, seeing exponential growth in their numbers since the early 2010s. As a person who frequently shops fast fashion, I can say that, although I love Forever 21, there is a key component that competing fast fashion companies all have in common Forever 21

  4. There’s no denying that Forever 21 is one of the biggest fast fashion distributors of our generation, seeing exponential growth in their numbers since the early 2010s. As a person who frequently shops fast fashion, I can say that, although I love Forever 21, there is a key component that competing fast fashion companies all have in common that Forever 21 does not excel in, which is online shipping. Yes, there is an online shipping option on the official website, but the overall experience is not the most convenient, from package dealing to the tracking. Fast fashion powerhouses like Shein, Zara, H&M, and Temu always ensure that the online shipping process is easy and unstressful.
    A personal experience I’ve had with Forever 21 was a couple months back. I ordered a three pair-pack of earrings for 10 dollars with nothing else, and as soon as I placed the order, I immediately knew something was off. Usually after you place an order online, you get the order details and the tracking link, but the tracking link was not there. I Googled “how to track your Forever 21 order” to only find no accurate results, which obviously made me very concerned and upset. That wasn’t all that disappointed me about the whole shipping and delivery process. A week passes by and the package hasn’t arrived yet, which wasn’t a big concern since most fast fashion comes from overseas, but I got a notification on my phone that my package had been canceled. At that point, I kind of shrugged it off since I assumed that my money would be refunded shortly. It never happened though. Surprisingly though, three weeks after I placed order, lo and behold, I get a package in the mail from Forever 21. I was obviously very shocked since I was notified that my package was canceled a couple of weeks prior. I go inside to open the package, and what I find makes me disappointed once again. Two of the three pairs of earrings were damaged, that unfortunately, was beyond repair. Overall, the shipping and delivery process was very confusing and unsatisfactory.
    Forever 21 can be better and they have chance of becoming the Forever 21 we all knew and loved! They just need to make it a priority to better their online shipping process so people in the future aren’t as disappointed as I was.

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