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Welcome back!

Harry here.

FYI - it’s Wall Street Compensation Survey time: We run several compensation reports on Buyside Hub - including a summer cycle Investment Banking one this year. We’ve collected a significant amount of IB Comp Data, so if you’re summer cycle make sure you contribute anonymously in advance of our report. Join for free here.

I’m really excited to get into today’s piece on Forever 21. The retail landscape has become increasingly challenging to deploy capital into, and you’ll see why in this piece. It’s easy to forget a lot of failed retailers were high-flying, strong unit-growth, low leverage stories - but even with a past like that, the ability to invest in retail has significantly soured.

Note - this is just Part I of a two part series on Forever 21. Part II is going to be for HYH Premium Subscribers.

HYH Premium includes 1) My Credit Recruiting Resources that I used to recruit for and land buyside credit seats 2) My City Guides on different firms in U.S. Cities, and 3) Business Case Studies.

Generally this has been an annual plan, priced at $135/year, but I’ve decided to add a monthly $48.99/month option for people who may need the offering for a short period of time.

Let’s get into it.

Forever 21 Part I:

In recent years, retail has been increasingly challenged and harder to invest in. We’ve seen this recently with Saks, which struggled immediately following the Neiman Marcus acquisition. While every distressed investor needs to stay sharp on opportunities in retail, iconic brands have been waiving the white-flag of defeat in recent years. Such is the case for Forever 21, a former power-house retailer.

There’s a lot we can learn from Forever 21’s trouble that can help making future retail investments - especially as it relates to lease obligations, restrictive covenants, supply chain issues and a variety of other systemic factors. 

Forever 21’s story began in 1984 when Do Won Chang and his wife Jin Sook Chang, recent Korean immigrants, opened a small shop called “Fashion 21” in Los Angeles. This inaugural location was a humble 900-square-foot shop in Los Angeles that grossed $700,000 in its first year, laying the groundwork for what would become Forever 21’s global empire.[1]  Riding this momentum, the Changs rebranded the business as Forever 21 in 1987 to emphasize youthful aspiration – 21 as the “enviable age” everyone looked forward to or remembered fondly. Throughout the growth, the Chang family kept close control of the privately held company – declining offers to cash out – and ran it with the nimbleness of a family business even as it scaled into a nationwide chain. [1]

Operational Model: Forever 21 pioneered a fast-fashion operational model built on speed and agility. The Changs focused on keeping prices ultra low to attract teens and young adults, which meant tightly managing costs and supply chain efficiency. As the company expanded, it maintained an ability to make quick merchandising decisions, but with the “horsepower to churn out high volumes of product” across hundreds of stores. This “mass with class” strategy – selling huge volumes of trendy clothes at rock-bottom prices – drove explosive growth. 

Forever 21’s growth strategy was unapologetically aggressive. Domestically, the company took advantage of downturns in the retail real estate market to grab prime locations. It moved into former Mervyn’s and Borders locations, and even acquired fashion chain Gadzooks in 2005 to accelerate store count growth. These moves doubled its store count from about 200 to 400 between 2005 and 2007. [5] By 2010, Forever 21 was “going gangbusters” with nearly 500 stores and continuing to expand while other retailers retrenched. 

By 2015, Forever 21 had over 750 stores globally, revenue of $4.4B [7] and EBITDA of $96MM [3]. At its peak it employed 43,000 people.[1] The company’s rise from one family-run boutique to a fast-fashion empire exemplified a retail American Dream story, built on relentless expansion, keen fashion instincts, and strong supplier relationships.

International Push

Not content with domestic dominance, Forever 21 had aggressively pushed overseas starting in the late 2000s. It opened its first international store in Canada in 2001 and by 2005 had 7 international stores. [1] Then the pace quickened dramatically: between 2005 and 2015, Forever 21 opened over 200 international stores, expanding to 47 countries by the mid-2010s. [1] The strategy was often to establish a flagship mega-store in a major city (like London’s Oxford Street or Tokyo’s Shibuya district), then open smaller satellite stores in surrounding areas. However, Forever 21 “was generally unable to accumulate sufficient storefronts in lower-rent areas” to balance the expensive flagships. Many foreign ventures ended up being just a handful of large, costly stores without the support of a dense store network. By 2015, Forever 21 operated 251 international stores, but profitability abroad lagged far behind the U.S. Specifically the US stores reported an EBITDA of $241MM, which is significantly higher than the EBITDA of $(145) reported by the international and Riley rose stores.

In 2017, Forever 21’s global store count peaked with over 800+ stores (about 550 in the U.S., and the rest abroad) and a physical presence in 57 countries worldwide. [3] This massive brick-and-mortar footprint made Forever 21 one of the world’s largest specialty apparel retailers. Over 70 of its stores were giant “big box” formats over 35,000 sq. ft. – essentially mini-department stores filled floor-to-ceiling with low-priced fashions. While these cavernous stores drew in crowds during the brand’s heyday, they also carried high rents and inventory costs. A less obvious ramification of these flagship stores was the increasing supply chain complexities associated with stocking the variety of inventory to fill these stores with larger physical footprints. In order to keep store locations stocked with a variety of options, a greater number of product offerings were needed in order to provide distinct product offerings on every rack. This increased product range added complexity to the company's supply chain operations, further compounding any inventory management mistakes made by the fast-fashion retailer. Before the 2019 filing, Forever 21 utilized 90%  import-sourced merchandising, which helped them to compete in the ultra-low cost segment. Forever 21’s expansion also extended to new concepts: in 2014–2017 it launched F21 Red (an even-cheaper sub-brand) and Riley Rose, a beauty boutique concept spearheaded by the Chang daughters.

Cracks in the Fast-Fashion Facade: Decline and Distress

By the late 2010s, e-commerce was eroding mall traffic, the lifeblood of Forever 21’s business. As nearby tenants closed and shoppers moved online, its large stores drew fewer visitors. The company admitted that falling mall traffic was the biggest factor in its Chapter 11 filing. Its large footprint, locked into high-rent leases signed years earlier, became a drag on profitability. Between FY16 and FY17, store count rose about 3% but EBITDA plunged 95.3%, from $195M to $9M, meaning profitability per store fell even more sharply.

Internal missteps compounded the decline. After overstocking in 2016, management underbought in 2017, leaving shelves bare, then swung to overbuying in 2018, creating excess inventory that had to be marked down. Siloed teams produced duplicative designs, bloating SKU counts. By 2018, Forever 21 admitted its assortment was too complex and pledged to streamline around core trendy categories.

Another issue was that Forever 21 underinvested in e-commerce and digital marketing just as ultra-fast-fashion online upstarts were stealing its market share. By 2019, its website accounted for only 16% of sales,[4] while competitors like Fashion Nova and Shein – masters of Instagram and influencer marketing – lured away Forever 21’s young customer base. As one analyst put it, “(Forever 21) has lost much of the excitement and oomph critical to driving foot traffic and sales,” becoming “an also-ran too easily overlooked.” The brand that once set teen trends was now seen as stale and had lost relevance with its target demographic. In an industry with aggressive product aging cycles and shifting consumer preferences, the brick-and-mortar retailer struggled to pivot its branding and pricing strategy to compete with online-only players. These digital rivals typically combined lower prices with stronger margins, thanks to the absence of lease obligations. Whereas same-store sales, EBITDAR, and sales per square foot are key metrics for physical retail, the e-commerce space focuses on different metrics like AOV (average order value). With lagging marketing, supply chain issues, and slower shipping, it’s a fair assumption that Forever 21’s AOV trailed behind newer competitors.

Financial Decline: After years of breakneck growth, sales peaked around 2015–2016 at roughly $4.4BN globally. By 2017, revenue plummeted to about $3.4B – a shocking 23% drop in one year. [6] This steep decline was largely due to the inventory misjudgments and weak traffic, as 2017 was the first year Forever 21 really faltered. Sales stabilized around $3.3BN in 2018 and were about $3.1BN in the 12 months leading up to the bankruptcy in fall 2019. [6]In other words, Forever 21’s revenue had fallen roughly 30% from its mid-decade peak. But more importantly, profitability had completely collapsed. At its peak in 2016 the combination of international and Riley Rose stores delivered an EBITDA of -$83MM with an unlevered free cash flow of -$101MM. The previous year, FY 2015, used up a substantial amount of Forever 21`s available cash on the expansion which is demonstrated through the -$265MM in unlevered free cash flow. With the dramatic fall in global revenue, supply chain issues compounded by the instruments used to finance them, and a material use of cash with the international expansion, signs began to emerge that Forever 21 may not be around forever.  EBITDA turned negative in 2018 as the company struggled to cover fixed costs. The fall, illustrated below from peak total EBITDA in FY 2016 of $195MM to a total EBITDA of -$74MM in FY18 represents a total decline of $269MM in total EBITDA in the intermediate period, or approximately -$134MM per year between 2016 and 2018.

The company’s liquidity became severely strained. Forever 21 relied on an ABL tied to inventory and receivables for working capital. As sales shrank and margins eroded, the borrowing base under the ABL contracted, reducing availability. This “borrowing base spiral” was caused by Forever 21 having to carry less valuable, aged inventory that crowded out the ability to use the ABL for new products. The limited borrowing base availability created a negative feedback loop where Forever 21 didn’t have enough availability to invest in fresh inventory. 

Caught in this vicious cycle, the company had to keep unsold product on the shelves to avoid tripping covenants, leading to stale assortments that drove customers away. It is important to note that the company's largest piece of debt, the ABL facility has a springing fixed-charge coverage covenant that could be triggered if availability fell too low, as well as requirements for periodic inventory appraisals and audits. By mid-2019, Forever 21 was in danger of breaching these terms – hence the emergency amendments to waive defaults in July and September. The company negotiated last-minute amendments with its lenders in July and September 2019 to waive certain requirements (for example, delaying a required inventory appraisal that could have triggered a default). These temporary forbearances kept the doors open a few weeks longer, driving last ditch attempts to raise new capital. The company and advisor Lazard shopped a “first-in/last-out” (FILO) term loan to about 25 potential lenders in mid-2019. While a few financing offers came in, management concluded that merely layering on more debt out of court would not fix the underlying issues. [1] Without the ability to shed leases and restructure operations, more borrowing would just kick the can down the road. Facing dwindling cash, unsustainable operations, and no white-knight investor, Forever 21 had no choice but to file Chapter 11 in September 2019. While this default was triggered by the $194.5MM ABL facilities covenant, the company had a relatively low debt load pre-petition with an aggregate principal amount of approximately $227.7MM. [1] The major source of cash affecting driving this liquidity crunch was the pre-petition aggregate annual occupancy costs of Forever 21’s stores, which was approximately $450MM.

Capital Structure at Filing

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