Forever 21 is seeking rent concessions, facing financial struggles

Forever 21 is asking landlords for rent breaks as the fast-fashion player’s sales decline and it struggles to compete with smarter competitors, CNBC has learned.

The retailer, which has more than 380 stores in the U.S., has asked some landlords to cut rent by as much as 50%, people with knowledge of the matter told CNBC.

As the company faces financial difficulties, it has not hired counsel and is not considering filing for bankruptcy protection a second time, the people said. It was used to restructure many of the leases to reduce costs, he said.

Forever 21 is facing various problems that have plagued its business for a long time. It operates in an increasingly saturated fast-fashion market, people say. He also added that retailers are struggling to manage inventory and understand and respond to consumers.

The retailer struggled after it filed for bankruptcy protection in 2019 and was later bought by a consortium including brand management company Authentic Brands Group and landlords Simon Property Group and Brookfield Property Partners.

When the company filed for bankruptcy protection, it had more than 800 locations globally.

Like many retailers, former department store Forever 21 weighed on its balance sheet when it first filed for bankruptcy protection. Retailers have grown so fast during their growth phase that they have not been able to invest in their supply chain and quickly respond to changing trends.

Closing hundreds of stores after filing for bankruptcy protection hasn’t solved the problem.

Forever 21’s financial position also affected the performance of operator Sparc Group – a joint venture that includes Authentic, Simon and last summer, the Chinese-linked fast fashion giant Shein. Sparc ran Forever 21 operations, as well as several formerly bankrupt retailers, including Aeropostale, Brooks Brothers and Lucky Brand.

Sparc declined to comment to CNBC. Simon did not return a request for comment.

Sparc has been reviewing its budget and grappling with its own financial struggles, people familiar with the matter said.

Many of Sparc’s challenges stem from the difficulty of integrating multiple legacy brands and trying to centralize its teams, technology, marketing, e-commerce, sourcing and supply chain, one of the people said. It also contends with the problem of running brands that have been going on for a long time especially in malls.

Expensive rents for stores that don’t perform well for their size can often weigh on a retailer’s balance sheet and save money.

Forever 21 consistently paid vendors late last year, according to data from Creditsafe, a business intelligence platform that analyzes companies’ financial, legal and compliance risks. The data shows Forever 21’s payment patterns to vendors have fluctuated, with some bills more than 70 days past due by the end of 2023, according to Creditsafe.

Many companies, including many healthy ones, leave bills unpaid for weeks or months, but late payments can also signal larger financial problems. The industry average has been between 12 and 13 days in the past 12 months, Creditsafe spokeswoman Ragini Bhalla said.

In the past, Forever 21’s main competitors included H&M and Zara. Currently, their biggest opponents are ultra-fast retailers like Shein and Temu.

“The speed is almost impossible to compete with. So if you juxtapose any brand that was around 20 years ago to the new fast manufacturing companies that you want … it’s like comparing a cell phone from 2000 to the latest iPhone. , quality, everything is just different, ” said one of the men. “As soon as someone goes viral wearing a new outfit on TikTok, Shein immediately creates it and no regular brand can follow.”

At the ICR conference in January, Authentic Brands CEO Jamie Salter said that acquiring Forever 21 was “probably the biggest mistake” of his career, adding that he also made a mistake when he failed to recognize the competitive threat posed by Shein and Temu before him.

He recalled a conversation with Simon CEO David Simon, who asked Salter why he wanted to partner with Shein.

“I said, ‘David, this is the right decision, we can’t beat them. Their supply chain is very good. They know what’s going on. They already know this. We have to partner with them,'” Salter said. “So I was the one who dared to say, ‘Let’s be friends with these people.'”

As part of the two retailers’ partnership, Shein will design, manufacture and distribute a line of Forever 21-branded clothing and accessories that will be sold primarily on Shein’s website. Forever 21 has also hosted a Shein pop-up store and since welcoming Shein back, both have driven positive foot traffic to Forever 21 stores, one of the people said.

The two were originally linked last August and under the terms of the agreement, Shein acquired approximately one-third of Sparc while Sparc took a minority stake in Shein.

Due to concerns Forever 21 has had with rent, and the success of Shein’s pop-up stores, some industry observers have questioned whether the digital giant could take over Forever 21 stores. their business model involves small batch production and an inventory that is constantly changing based on trends.