How do you go from $4.4 billion as recently as 2015 to filing for bankruptcy in 2019? Let’s find out exactly how.

Forever 21 was once among America’s fastest-growing fast-fashion retailers.
It transformed its once penniless founders into billionaires, established itself as a powerhouse in the fast-fashion world, and, at its peak, made $4.4 billion in revenue.
But the once flush company is now preparing to file for bankruptcy. So, what happened?
Back in the day, Forever 21 embodied the American dream: In 1981, Jin Sook and Do Won “Don” Chang moved to Los Angeles from South Korea with no money, no college degrees, and speaking little English. To make ends meet, Jin Sook worked as a hairdresser while Don worked as a janitor, pumped gas, and served coffee. Until he noticed that “the people who drove the nicest cars were all in the garment business.” So three years later, with $11,000 in savings, the Changs opened a 900-square-foot clothing store called Fashion 21. The couple took advantage of wholesale closeouts to buy merchandise from manufacturers at a discount.
Their system worked. The store made $700,000 in sales its first year.
Fashion 21 was initially only popular with LA’s Korean American community. But the Changs leveraged their success, opening new stores every six months, which broadened the company’s customer base at the same time. They also changed the name to Forever 21 to emphasize the idea that it was “for anyone who wants to be trendy, fresh and young in spirit.”
The company’s key to success was simple: cultivate a huge following by selling trendy clothing for low prices. While this is something that today’s consumers pretty much expect, Forever 21 was one of the first to do it. And they were the fastest.
Jin Sook was eventually approving over 400 designs a day. Which meant the company could sell trends as they were happening. Even if some of those designs landed Forever 21 in trouble.
But while other brands and designers might not have been Forever 21’s biggest fans, customers couldn’t get enough of their affordable styles.
As a result, Forever 21 became one of the largest tenants of American malls, with 480 locations nationwide. And by 2015, business was booming. Forever 21’s sales peaked, with $4.4 billion in global sales that year.
As for the Changs? They became one of America’s wealthiest couples, with a combined net worth reaching an estimated $5.9 billion in March 2015.
Forever 21’s goal was to become an $8 billion company by 2017 and open 600 new stores in three years. But the company’s aggressive expansion would also lead to its downfall.
Part of what made Forever 21 popular in the first place was its fast-fashion model. Even though its products were always mass-produced, they still felt unique because its stores only sold select styles for a limited time.
However, as the company focused on growing bigger, its styles became more “cookie-cutter.” As a result, Forever 21 started to lose touch with its core customers, while competitors like H&M and Zara rose.
No longer the trendsetter, Forever 21 became the butt of the joke.
It’s also no longer the fastest in the game. Internet brands like Fashion Nova churn out celebrity- and influencer-inspired styles at a rapid-fire pace. And as e-commerce has continued to boom, traditional retailers like Forever 21 have struggled to adapt to changing consumer behaviors. According to a March 2019 survey, millennials make 60% of their purchases online and overall prefer online shopping over going to a physical store.
Yet, Forever 21 continued opening new stores as recently as 2016, even expanding existing stores to take over multiple floors with mens, children’s, and home-goods sections. Which could help explain why Forever 21’s sales are estimated to have dropped by 20% to 25% in 2018.
On top of that, the Changs, who still own the company, have lost more than $4 billion from their personal net worths.
The company overall is now $500 million in debt and considering filing for bankruptcy.
Forever 21 has already started downsizing its stores. And as one of the largest tenants of America’s mall’s, a widespread shutdown of Forever 21 could exacerbate what’s already being referred to as the “retail apocalypse,” which has already closed more than 15,000 retailers across the US and could shut down 75,000 more, according to investment firm UBS.
But bankruptcy doesn’t always mean the end for a company.
In fact, it could give Forever 21 time to restructure and bounce back.
The company could shut down its least profitable stores and try rebranding itself. But in an age of cheap internet boutiques and fast-fashion empires, this might not be enough.
So it turns out, Forever 21 might not be forever after all.

The Retail Apocalypse in detail

Stories of the “retail apocalypse” have become a standard fixture in business reporting in recent years, as one major chain after another has filed for bankruptcy. Most of the time, the effects of the internet, competition, and bad business decisions get the headlines. What’s frustrating is what these stories so often leave out: the role of private equity. The fact that these retailers were bought up by major Wall Street players, loaded up with debt, and then slowly bled for cash, goes unmentioned — or is consigned to the tenth paragraph.
In that sense, the demise of Forever 21 stands out precisely because it is an example of how those other factors can overturn a once-thriving business.
Retailers have been dropping like flies in recent years, with well-known chains like Sears and Toys ‘R’ Us as some of the most prominent examples. Gymboree, Nine West, Payless ShoeSource, and Mattress Firm have all recently folded. Fashion chains like Claire’s, Charlotte Russe, and PacSun — that focus on affordability and hipness, and thus constitute Forever 21’s most immediate competitors — have filed for bankruptcy. This year has already seen 8,200 individual store closings in the U.S., up from 2018’s death toll of 5,589.

And private equity has often played a critical part: “Many retailers have run into trouble after being purchased by private equity firms or hedge funds, which piled on debt,” CNN reported. “Forever 21, by contrast, is still owned by its founders.”

The company filed for Chapter 11 bankruptcy late September 2019 which is more of a “corporate reset button,” as Vox described it. The aim is for Forever 21 to still be around after the bankruptcy process concludes, just in a different and smaller form. The company has secured $275 million from its already-existing lenders through JPMorgan Chase, another $75 million worth of fresh capital from TPG Sixth Street Partners, as well as some other financing to tide it over during the restructuring. While the privately-owned company’s finances remain somewhat obscure, we do know from its bankruptcy filings that both its liabilities and its assets are in the $1-to-$10 billion range. That doesn’t mean too much debt wasn’t a problem for the company. But it does suggest how a company might be able to escape a wildly disproportionate debt load if it also avoids private equity’s clutches.

Private equity strategies generally involve a “heads we win, tails you lose” relationship with the companies they buy out. Even if they run the company into the ground, which they often do, the private equity companies can still walk away with the millions or billions they extracted in fees and such along the way.
For example, after being bought by a trio of private equity companies in 2004, Toys ‘R’ Us’ debt burden rose from $2.3 billion to $5.2 billion in 2017, while its cash stockpile shrank from $2.2 billion to $301 million. Sears owed about $5.6 billion in debt when it went under. In these instances, and others like them, the private equity companies that buy up these retailers are also often either the creditors that lend the debt or the facilitators of the transaction. They either benefit from the debt obligations payments, or from fees for their services. In Sears’ case, the hedge funder that bought the company even had it sell off $3 billion worth of physical property to another fund he also benefited from.

By contrast, Forever 21’s story appears much more mundane. The company focused on affordable prices and designs that kept up with the latest styles. It also expanded at an extraordinarily fast clip in the early 2000s: “We went from seven countries to 47 countries within a less-than-six-year time frame and with that came a lot of complexity,” Linda Chang, daughter to Forever 21’s founders and the chain’s executive vice president, told The New York Times. Combined with a focus on large and elaborate retail spaces, that growth arguably left the company over-extended when internet commerce began in earnest. Online sales currently account for 16 percent of Forever 21’s sales, and between 2016 and 2018 its annual revenue fell from $4.4 billion to $3.3 billion.
“The retail industry is obviously changing — there has been a softening of mall traffic and sales are shifting more to online,” Chang admitted.

The tectonic shifts that came with America’s rising inequality also played a major role. Department stores like Forever 21 rely on a customer base that’s middle class, well-paid, and geographically dispersed. But then came deindustrialization, trade shocks, the end of unions, and the larger failures of macroeconomic policymaking that gave us the Great Recession, and its interminable and grinding recovery. That’s led to much more regional inequality, and geographic concentration of high incomes in cities. Meanwhile, the more dispersed consumers that department chains and traditional malls relied on have seen their wages stagnate, their jobs vanish, and their buying power collapse.
Is there any hope for Forever 21?
Maybe. Once the bankruptcy is over, the company plans for a few hundred stores to remain open in the U.S., along with some presence in Latin America. There’s also at least some evidence that cultural shifts are driving some younger shoppers away from the internet and back towards physical stores.

That still may not be enough, but if it is it’ll be because the company still has what Sears and company did not — owners whose primary incentive is to save the business rather than scrap it for parts.

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Sources The Week, Business Insider

How do you go from $4.4 billion as recently as 2015 to filing for bankruptcy in 2019?