Fast-fashion pioneer Forever 21's shutdown of its roughly 350 stores will bring U.S. retail closings to over 4,000 so far this year, more than half the number for all 2024, as chains are impacted by foreign competitors such as Shein and Temu.
The U.S. operator of Los Angeles-based Forever 21, a mall mainstay, is seeking voluntary Chapter 11 protection in U.S. Bankruptcy Court for the District of Delaware. The court filing Sunday marks the second time that the retailer has sought bankruptcy protection, with the first instance occurring in 2019, and has been expected for weeks.
But this go-around, the chain's current operator, F21 OpCo, plans to wind down the business and close its store portfolio of 354 locations. Even as it conducts store-closing sales, Forever 21 said it will continue a marketing process to try to solicit interest in a going-concern transaction or a sale of some or all of its assets to a third party. Forever 21's stores outside the United States are not included in the bankruptcy filing. It so far has failed to find a buyer.
Hilco Global, Gordon Brothers and SB360 Capital Partners are handling the liquidation of Forever 21's inventory and conducting the closing sales.
Forever 21's looming demise reflects challenges somewhat unique to it, as well as those plaguing the entire retail industry. Like other chains, Forever 21 said it saw a nice lift in sales in the wake of the pandemic. However, that was followed by a period of high inflation, causing consumers to cut back their spending as well as raising costs for retailers. The rise of online shopping's popularity took a toll, as well. Forever 21 also now faces stiff competition in the sector it was a forerunner in: fast fashion, where retailers quickly design, manufacture and sell inexpensive and low-quality apparel that copies the latest catwalk looks. Fast Fashion is known to objectively have horrible environmental and sustainability consequences. Forever 21 blamed Chinese online fast-fashion purveyors Shein and Temu for cutting into its sales.
Store closings mount
The U.S. retail industry overall is tracking to have a bumpy year, likely worse than 2024 in terms of store closings, according to Coresight Research. As of last week, retailers had announced 3,735 store closings and 2,265 openings year to date. Adding in the Forever 21 closings, the number of U.S. stores shutting rises to about 4,100. That compares to 7,507 store closings for all of 2024, according to Coresight data.
Joann, Bargain Hunt, Zips Car Wash and On the Border Mexican Grill & Cantina have filed for Chapter 11 during the past few months and are closing hundreds of locations. Other retailers closing stores this year include Dollar General, Macy's, Big Lots and Party City.
"While we have evaluated all options to best position the company for the future, we have been unable to find a sustainable path forward, given competition from foreign fast-fashion companies, which have been able to take advantage of the de minimis exemption to undercut our brand on pricing and margin, as well as rising costs, economic challenges impacting our core customers, and evolving consumer trends," Brad Sell, chief financial officer of F21 OpCo, said in a statement late Sunday. "As we move through the process, we will work diligently to minimize the impact on our employees, customers, vendors and other stakeholders.”
Stephen Coulombe, Forever 21's co-chief restructuring officer, also discussed Shein's and Temu's advantages via the de minimis exemption in an affidavit filed with the court.
"The debtors’ business has been materially and negatively impacted by the ability for online retailers to take advantage of the 'de minimis exemption,' which exempts goods valued under $800 from import duties and tariffs," Coulombe said. "Certain non-U.S. online retailers that compete with the debtors, such as Temu and Shein, have taken advantage of this exemption and, therefore, have been able to pass significant savings onto consumers. Consequently, retailers that must pay duties and tariffs to purchase product for their stores and warehouses in the United States, such as the company, have been undercut."
Congress passed the de minimis tax exemption, allowing shipments bound for American businesses and consumers valued under $800 (per person, per day) to enter the United States free of duty and taxes.
Mall owners rescue
In early 2020, mall landlord giants Simon Property Group and Brookfield Property Partners, as well as Authentic Brands Group, a global brand development firm, paid $81 million to purchase Forever 21 out of bankruptcy. In person-shopping, and Forever 21's sales picked up, after the peak of the pandemic. The retailer generated about $2 billion in revenue in fiscal 2021, according to Coulombe. But then sales went sour.
"The debtors’ business operations have been negatively impacted by challenges affecting many peer retailers, including persistent inflation, decreased consumer discretionary spending, a stubborn rise in interest rates, contracting margins, supply chain interruptions, competition from non-U.S. retailers taking advantage of the de minimis exemption, and shifting customer preferences," Coulombe said.
Forever 21 lost more than $400 million over the past three fiscal years and, in fiscal year 2024 alone, lost roughly $150 million, he said.
"Forever 21 was always a retailer living on borrowed time," Neil Saunders, a retail analyst and managing director of analytics firm GlobalData, said in a note Monday. "Over recent years it has been hit with dual headwinds from a weak apparel market and stiff competition from cheap Chinese marketplaces. Both things have eroded its standing and depleted its market share. Forever 21 has not helped itself through these challenges: merchandising and the assortment have been lackluster, and the brand has lacked any clear point of view for a long time. The net result is that more and more customers, especially those at the younger end of the market, have abandoned it."
Forever 21 declined to respond to Saunders' comments.
The stores on Forever 21's closing list total about 7.7 million square feet, according to Bill Read, executive vice president at Retail Specialists.
As of Chapter 11 filing, Forever 21 leases retail space from roughly 78 different landlords nationwide, with about 27% of its operating stores leased from Simon and 19% from Brookfield, according to Coulombe. About 123 of its remaining open stores are in malls, 55 are in outlet centers, and the balance are in cities and suburban shopping areas, he said.
CMBS impact
Forever 21’s importance to malls and shopping centers is evident in retail properties financed through commercial mortgage-backed securities debt. Forever 21 is a tenant at properties backing loans in 120 CMBS deals with an outstanding current loan and fees due balance of $9.83 billion, according to data from Morningstar Credit.
Forever 21 is one of the five largest tenants in 74 of those CMBS-financed properties, leasing a total of 1.92 million square feet, according to Morningstar data. Their average leased square footage is 26,000 square feet in those malls.
Its largest leased space at any of those malls is 153,500 square feet at the Galleria at Tyler in Riverside, California, owned in a joint venture by Brookfield and Teachers' Retirement System of the State of Illinois, according to the CMBS data. Brookfield and its affiliates are borrowers on $3.92 billion of the total CMBS debt.
Simon Property Group, including Taubman Centers, is the borrower on $2.49 billion of the CMBS debt.
The CMBS loans on 14 of the properties are already experiencing financial troubles, with their debt totaling $2.65 billion being specially serviced.
The highest amount of specially serviced debt backs Brookfield’s 1.87 million-square-foot Natick Mall in Natick, Massachusetts. A $505 million CMBS loan matured last November, according to CMBS data supplied to CoStar.
Terms of a two-year extension of the maturity date are being negotiated, according to CMBS loan commentary in February.
Filling space
It remains to be seen how fast landlords will be able to fill the Forever 21 spaces. The vacancy rate for regional and super-regional malls in the U.S. is 9.1%, according to Brandon Svec, national director of U.S. retail analytics for CoStar Group. That compares to the overall U.S. retail vacancy rate of 4.2%, according to CoStar data.
Roughly 75% of Forever 21's leases determine their rent "based on a calculation of such location’s prior month’s revenue, rather than on a flat rate basis," according to Coulombe.
"The percentage rent owed to applicable landlords depends on many factors, including but not limited to the productivity of the real estate, the supply and demand dynamics for space, geographic location, store square footage, and other considerations," he said.
As vacancies are still low at A-plus mall properties, "Forever 21 closures will be a good thing for those landlords, which will quickly replace those vacancies with more productive retailers at higher rents," Rudolph Milian, president and CEO of Woodcliff Realty Advisors, said in an email to CoStar News.
"However, in bankruptcy cases, the court tries to sell those leases, and that would be bad for landlords," he said. "Fast fashion is a segment where strong players such as Zara are doing well but others like Forever 21 can’t seem to turn out a profit. Another problem that is inherent with Forever 21 is the very large footprint of its leased premises. The chain doesn’t seem to be able to perform adequately in a sales per square foot basis to pay for its occupancy costs."
For the record
Paul, Weiss, Rifkind, Wharton & Garrison and Young Conaway Stargatt & Taylor are serving as the company’s proposed legal counsel. BRG is serving as its financial advisor, and RCS Real Estate Advisers is serving as its proposed real estate advisor. SSG Capital Advisors is serving as the company’s investment banker, and Reevemark is serving as communications advisor.