Forever 21 bankruptcy reportedly near, 'paying a big price' for mistakes

Aarthi Swaminathan
Finance Writer

This post has been updated.

Forever 21 is going to file for bankruptcy as early as Sunday, according to the Wall Street Journal.

The company had been “searching for a new loan” to prevent the filing for months, but has been unsuccessful. One person familiar with the matter told WSJ that Forever 21 planned to shut down more than 700 stores.

After filing, F21 will join the ranks of other retailers from Sears (SHLDQ) to Toys ‘R’ Us that have experienced a similar fate.

“There are some principles to success in retail and in marketing in general, and … if you fall out a line on those principles, you end up paying a big price,” Roger Beahm, executive director of the Center for Retail Innovation at Wake Forest University, told Yahoo Finance. “And I think in this case, Forever 21 failed in some respects.”

Shoppers walk past a sales sign in the window of fast fashion retailer Forever 21 on Oxford Street in London, England, on July 12, 2019. (Photo by David Cliff/NurPhoto via Getty Images)

Beahm highlighted that there were a few key things a retailer needed to get right: maintain a unique type of product, keep evolving, and remain forward-thinking.

“Let's face it, retail is especially dynamic right now,” he added. “You have to be willing to take some risks.”

Survival of the fittest

The decline of traditional brick-and-mortar shops is not a new phenomenon. It’s generally believed to be a result of consumers shifting online, stimulated by the rise of e-commerce giant Amazon (AMZN). But what’s less obvious is why some retailers have managed to survive the retail apocalypse, while others haven’t.

While 75,000 retail stores are expected to close shop by 2026 according to UBS, a separate report from research and advisory firm IHL Group found that more chains are opening new locations than closing them.

These include companies like Ulta Beauty (ULTA), Dollar Tree (DLTR) and 7-Eleven, which are seeing healthy expansion.

(Graphic: David Foster/Yahoo Finance)

The two key reasons why some retailers are able to weather the headwinds were that they didn’t hold too much debt and didn’t expand too quickly in the past decade, the IHL Group stated.

“Retailers without these characteristics have continued to thrive in this market,” the report noted, adding that when a retailer closes a lot of stores, “it is more of an indictment on the individual retailer rather than an overall retail industry problem as has often been reported.”

Beahm disagreed.

“I don't know that the number of stores counts so much as let's say the number of square feet per store,” said Beahm. “What you're seeing is, as consumers are changing their buying habits — from shopping purely in brick-and-mortar to buying more online — there's less need to carry the merchandise.”

And so it becomes “a matter of how much space do you allocate for those walk in customers, or those customers who still prefer to shop in brick-and-mortar versus those shoppers who prefer to buy online,” he added.

Forever 21 is not alone

Several retailers haven’t exactly had a crystal ball in the Amazon age and have ended up filing for bankruptcy in recent years. Here are a few:

Aeropostale

Established: 1973

Bankruptcy declared: 2016

Stores prior to bankruptcy: Around 800

Source: Marketplace

A general view of an American Apparel store, as the US fashion chain are closing 12 UK stores leaving 147 employees redundant. (Photo: Victoria Jones/PA Images via Getty Images)

American Apparel

Established: 1989

Bankruptcy declared: 2016

Stores prior to bankruptcy: 110

Source: CNN Business

The Limited

Established: 1963

Bankruptcy declared: 2017

Stores prior to bankruptcy: 250

Source: Reuters

Paper covers the windows at a closed Wet Seal store on January 7, 2015 in San Francisco, California. (Photo: Justin Sullivan/Getty Images)

Wet Seal

Established: 1962

Bankruptcy first declared: 2015

Stores prior to bankruptcy: 338

Source: CNN Business

75% off sign in the entrance to Nine West. (Photo by: Jeffrey Greenberg/Universal Images Group via Getty Images)

Nine West

Established: 1983

Bankruptcy declared: 2018

Stores prior to bankruptcy: 71 stores (and sold in 1,200 locations)

Source: USA Today

Claire’s

Established: 1978

Bankruptcy declared: 2018

Stores prior to bankruptcy: 7,500 (includes locations within stores)

Source: WSJ

Two Mattress Firm stores, a brand owned by Steinhoff, lie on either side of the street in Encinitas, California, U.S., January 25, 2018. REUTERS/Mike Blake

Mattress Firm

Established: 1986

Bankruptcy declared: 2018

Stores prior to bankruptcy: 3,500

Source: Bloomberg

‘Retail is not going to go away’

And at the end of the day, it comes down to how quickly the company can evolve to match shifting consumer trends.

“Let's face it, retail’s one of the things that have been around since antiquity. So retail is not going to go away,” said Beahm. “The only thing that's going to change… is the old way of doing things being replaced by the new way of doing things.”

As for Forever 21, there’s one thing shoppers are looking forward to.

Aarthi is a writer for Yahoo Finance. Follow her on Twitter @aarthiswami.

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