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Forever 21 Hits Ch. 11 After International Overexpansion

Fast-fashion retailer Forever 21 filed for Chapter 11 protection late Sunday in Delaware, saying an overly aggressive international expansion plan didn’t work out when its merchandise wasn’t as popular as expected overseas and sales couldn’t keep up with rent obligations.
In initial court filings, Chief Restructuring Officer Jonathan Goulding said the company, formed by husband and wife team Jin Sook and Do Won Chang in 1981, had strong performance from its stores in the United States and Latin America, but its hundreds of stores elsewhere in the world ate into that success.
According to a first-day declaration from Goulding, between 2014 and July 2019 global sales dropped from a peak of $4.1 billion to $3.1 billion.
“Specifically, Forever 21’s storefronts in Canada, Europe and Asia are losing approximately $10 million per month on average over the past 12 months,” the declaration said. “These losses from international operations ... have rendered Forever 21 unable to service its outstanding debt.”
The company, which operates nearly 800 stores worldwide, relies on strong, long-term vendor relationships to supply its stores with merchandise focused on the latest trends in fashion, according to the declaration. Working with some vendors for more than 30 years, Forever 21 has been able to secure more favorable terms than its competitors to execute its “fast fashion” strategy to bring trendy clothing to market soon after it appears on the runway, Goulding said.
To pursue its Chapter 11 goals of reducing its global store footprint, negotiating rent concessions with landlords and recalibrating its product design process, Goulding said the debtor has secured much-needed support from the bulk of its vendors to keep its critical supply chain intact. Even though Forever 21 has nearly $350 million in outstanding accounts payable to its suppliers, he said the vendor relationships remain strong.
As the holiday shopping season approaches, maintaining inventory levels is essential to a successful restructuring, the declaration said.
“While there is still much work to be done, unlike nearly every other retailer who finds itself filing for Chapter 11 during the fourth quarter, Forever 21, has, to date, not experienced a flood of cash-on-delivery demands or shipping freezes,” Goulding said.
In a letter to customers on the company’s website, Forever 21 said it hoped to emerge from the bankruptcy process in a position to continue its historical successes.
“We are confident this is the right path for the long-term health of our business. Once we complete a reorganization, Forever 21 will be a stronger, more viable company that is better positioned to prosper for years to come. We look forward to continuing to provide you with the great service and curated assortment of merchandise that you expect from us,” the message said.
To fund its operations during the Chapter 11 case, Forever 21 has secured a commitment for $350 million in debtor-in-possession financing in the form of a $275 million asset-based lending facility and a $75 million term loan.
Forever 21 comes to court with $195 million in secured ABL debt, $20 million in term loan debt and $13.2 million in note debt.
The Changs founded the retail chain with a single store in Los Angeles, just three years after immigrating from South Korea at the age of 22. Do Won Chang focused on developing vendor relationships while Jin Sook showed an affinity for identifying coming trends in fashion. In the decades following, they engaged in an aggressive expansion strategy, first in the United States and then outward to Canada, Latin America, Europe and Asia.
After the global recession of 2008, the company was able to accelerate its expansion by acquiring retail space vacated by struggling competitors, Goulding said. In 2005, Forever 21 had just one international location but by 2017 it topped out at 212 overseas stores.
Forever 21 is represented by Laura Davis Jones, James E. O’Neill and Timothy P. Cairns of Pachulski Stang Ziehl & Jones LLP and Joshua A. Sussberg, Aparna Yenamandra and Anup Sathy of Kirkland & Ellis LLP.
The lead case is In re: Forever 21 Inc., case number 1:19-bk-12122, in the U.S. Bankruptcy Court for the District of Delaware.