Retail Carnage Continues: Forever 21 Bankruptcy Expected By Sunday

The collapse of the brick and mortar retail space is continuing at a breakneck pace in 2019. The latest victim, Forever 21, is expected to file for bankruptcy as soon as Sunday, according to the Wall Street Journal. JP Morgan is the company's most senior lender and has agreed to roll over its loan to the retailer into a bankruptcy financing package, according to the report. 

But despite "people familiar with the matter" claiming that bankruptcy is imminent, the company has come out and said that it doesn’t have any plans to file for bankruptcy. 

It said: "Our stores are open and it is our intention to continue to operate the vast majority of U.S. stores, as well as a smaller amount of international stores, providing customers with great service and the curated assortment of merchandise that they love and expect from Forever 21. Please visit our store locator to find the most up to date store list."

Let’s revisit that statement early next week.

This bankruptcy marks the latest in what has been nothing short of carnage so far this year for the retail industry. Between January and June in 2019, more than 7,000 retail stores closed. This amounts to more than all of the stores that closed throughout the entire year of 2018. Many were hurt by a lackluster holiday shopping season at the end of 2018.

Robert Feinstein, a bankruptcy lawyer who represents creditors in major retail bankruptcies, including Payless and Gymboree said: "The headwinds for retail are gaining hurricane force."

Forever 21's biggest misstep came when it expanded by opening large stores at a time younger consumers were making a shift online to shop. The company gambled by moving into stores that were sometimes double or triple the size of its previous locations. It pushed into new categories like menswear, footwear, lingerie and plus sizes to help fill the new space. The result were stores that felt too "cavernous" and merchandise that felt repetitive.

Its struggles prompted the company to enter into talks with its landlords about shrinking its retail space and renegotiating leases. The company has also been in the midst of a months long search for a loan and is currently facing a cash crunch. One of the sources told the Journal that the chain is planning to shut down more than 700 stores in bankruptcy.

Some retailers have adapted quicker than others to "the Amazon effect".

For instance, both Walmart and Target posted rising sales in the second quarter, as a promising mix of physical stores and online sales has paid off for both of them. At the same time, overall retail sales continue to remain solid as a result of a relatively "strong economy" and low unemployment.

But that doesn’t mean that the challenges are over, according to Jeffrey Gennette, CEO of Macy's. He said: “The competition is fierce. Retail is certainly not for the faint of heart.”

In the first six months of 2019, companies like Payless, Gymboree and Charlotte Russe all filed for bankruptcy. Fourteen total retailers with at least twenty stores each have filed for bankruptcy this year, according to BDO. The list also includes Charming Charlie Holdings Inc., Barneys New York, A’Gaci and Avenue Stores.

Many of these companies have closed down stores as a result of their respective bankruptcies. Some retailers are dropping their well-known flagship stores and instead opting for smaller locations in urban areas.

During the first half of 2019, 19 retailers said that they would close a combined 7200 stores. Payless, Gymboree and Charlotte Russe accounted for about 3,700 of these on their own.

For comparison, last year, there weren’t even 6,000 total store closings announced. There were 6,600 closings in 2017. Recall, we reported in mid 2019 that 12,000 stores were forecasted to close this year. 

Marshal Cohen, chief retail analyst at NPD Group, says the U.S. simply has too many stores per capita. He said: “We don’t need as many stores as we have. Bankruptcies used to be a dirty word. Bankruptcies is a way to clean up your challenged business.”