Forever21 Bankruptcy Analysis

Submitted by: Nia N. Consuelo

MGT198 — EM01

A report on the famous fast-fashion store, Forever 21, and its recent issue of filing for
bankruptcy in mid-2019. This report contains the history of the problems, the five types
of Analysis to the company, and a resolution for the current status of Forever 21.
 MGT198 — Forever 21 Bankruptcy
•••

Contents
I. Executive Summary ....................................................................... 2

II. Statement of the Problem .............................................................. 3

III. History of the Problem .................................................................... 4

1. Outdated designs ....................................................................... 4

2. Inconsistency and Lack of Quality Control .............................. 4
3. Overlooking the Power of Influencer Marketing ...................... 4
4. Growing Awareness on the Detriments of Fast Fashion .......... 5
5. The Rising Popularity of Thrift Shopping ..................................... 5
IV. Financial Analysis ........................................................................... 6

V. Situation and Problem Analysis ..................................................... 7

VI. Decision Analysis ............................................................................ 8

VII. Potential Problem Analysis ........................................................... 9

VIII. Resolution / Conclusion ............................................................. 10

References ........................................................................................ 11

1
 MGT198 — Forever 21 Bankruptcy
•••

I. Executive Summary
The famous fast-fashion store, Forever 21 has announced its filing for bankruptcy
during the mid of 2019. While the company has a solid reputation in the fashion industry,
it had several controversies that influenced greatly on consumer’s perspective and
preferences. In 2018, Lincoln Height’s Forever 21 Inc. posted a loss of more than 29
million pounds, or almost $40 million, for its seven U.K. retail stores for the year ended
Feb. 28, 2016, according to an annual report filed with the U.K. government on Dec. 15,
2017. Early September 2019, Forever 21 faced at least a $10 million lawsuit with pop
singer Ariana Grande for using marketing promotions that gave the exact vibes that
the “7 Rings” music video that Grande had.

Issues such as outdated designs, inconsistency and lack of quality control,

overlooking the power of influencer marketing, growing awareness on the detriments
of fast fashion, and the rising popularity of thrift shopping are explained thoroughly in
this report as well.

The status and path where Forever 21 is leading to somehow puts a big question
mark to everyone’s minds as it lacks style identity from its products. It still has a good
reputation from its solid sales ten years ago, but it hasn’t been quite the same with this
generation as their preferences are far from different with the style that Forever 21
delivers. With the recent news that several popular American companies, like Toys R Us,
are filing for bankruptcy as well. However, with Toys R Us, they made a way for it to turn
the game around as their situation is more difficult because children nowadays lack
the interest to play with toys or participate in outdoor games because of iPads and
other game technologies.

This report analyzes the full situation Forever 21 is currently in, and has provided
resolutions and conclusions to keep up with the competition and the demand of the
market. It’s still not too late because it’s still filing for a Chapter 11 Bankruptcy which is
also known as a "reorganization" bankruptcy.

2
 MGT198 — Forever 21 Bankruptcy
•••

II. Statement of the Problem

According to a report on Bloomberg, Forever 21 is filing for bankruptcy. The company is
reported to have been “in talks for additional financing and is working with a team of advisers to
help restructure its debt, but negotiations with possible lenders have so far stalled”. However, the
company is looking to file for a Chapter 11 bankruptcy, which is frequently referred to as a
"reorganization" bankruptcy. It doesn’t mean that the brand will immediately halt all business and
die off. Chapter 11 allows a company to continue operating while it comes up with a plan to
restructure, reorganize or rebrand itself.

Unfortunately, the company is facing more financial problems such as a recent issue with
the famous pop singer, Ariana Grande, who sued Forever 21 for at least $10 million due to a recent
marketing promotion of the company that showed a similarity of vibe with Grande’s “7 Rings” music
video.

3
 MGT198 — Forever 21 Bankruptcy
•••

III. History of the Problem

Forever 21 came to be one known as of America’s fastest growing fast-fashion
retailers, and when news came that the company is now filing for bankruptcy, a lot of its
shoppers were shocked. However, this is no surprise because the situation isn’t something
that just happened overnight. The following that are going to be mentioned are factors
that placed Forever 21 where it is today:

1. Outdated designs
While it’s a fact that Forever 21 has a reputation as one of the top fast-fashion
store in the United States ten years ago, the generation today doesn’t seem to
agree with that. The popular styles that the younger generation go for
nowadays are either streetwear or elegant monochrome outfits, and Forever 21
just doesn’t do either very well.

2. Inconsistency and Lack of Quality Control

Forever 21 outsources their products from various manufacturers, that is why the
inconsistency and the low quality of their products give frustrations to their
customers. Thus, reducing their loyal customer base.

3. Overlooking the Power of Influencer Marketing

Similar to the Nokia story where they didn’t embrace the innovation of the
evolving technology, Forever 21 hasn’t embraced the culture of sponsoring
Instagram influencers that actually has high selling power. Being unreliant to
influencer marketing may look like you’re irrelevant now to society, plus this is also
a proven low-cost form of advertisement. Forever 21 did in fact tried to use
influencers, but with very high taste and price such as the recent Ariana Grande
issue where they offered to partner with her, but she declined. This didn’t stop the
company, so they still preceded to create a marketing promotion similar to the
vibes that Grande presents in her music videos which ended in a lawsuit. 4
 MGT198 — Forever 21 Bankruptcy
•••

4. Growing Awareness on the Detriments of Fast Fashion

Customers are getting meticulous and wiser when in comes to choosing a brand. They
not only look at the company’s quality and price of products, but they also look into the
firm’s values. The rise of arguments against fast-fashion company who outsources their
products from third-world countries report news about the horrible working conditions
people are put through and the lousy pay they get in return for their work in sweatshops
to produce clothing for well-known companies, such as Forever 21 itself. (Kitroeff & Kim,
2017) Customers are now willing to pay more to companies who practices and prioritizes
values more than profit, and are very much willing to boycott companies who disregard
this characteristic.

5. The Rising Popularity of Thrift Shopping

With the influence of social media, YouTubers and Influencers are now initiating
their lifestyle of thrift shopping. The brands they find at thrift stores aren’t unknown
ones, they’re often expensive, maybe even luxury brands that are being sold at
amazingly low prices. So, it’s just inconceivable that one would buy one article of
clothing from a retail brand when you could get several quality thrift pieces for
the same price.

5
 MGT198 — Forever 21 Bankruptcy
•••

IV. Financial Analysis

The firm’s financial data are not open to the public as it is a privately-owned business.
According to an article on Forbes, one industry analyst estimates that sales of Forever 21
dropped by 20% or 25% last year. Along with this, Forever 21 is known to be expanding at
two-story outlets or at least 79,000 square feet single floor branches. This is the reason why
30% of their revenue on rent. (Debter & Gross, 2019)

In 2018, Lincoln Height’s Forever 21 Inc. posted a loss of more than 29 million pounds,
or almost $40 million, for its seven U.K. retail stores for the year ended Feb. 28, 2016,
according to an annual report filed with the U.K. government on Dec. 15, 2017. (Anderson,
2018)

6
 MGT198 — Forever 21 Bankruptcy
•••

V. Situation and Problem Analysis

Where is Forever 21 now? It has an edge that its name puts a ring to everyone’s ears.
But the one main problem that they have is that they don’t have a product identity. As
mentioned earlier, the style that their products have are low-quality and outdated.
Companies such as UNIQLO, who delivers minimalist and high-quality fabric, and Zara who
has historically been known to mimic trends from the runway.

Forever 21 on the other hand, had several controversies regarding the design of their
products that turns potential customers off from buying. In 2011, Forever 21 was criticized
for putting Christian slogans printed on some of its shirts with phrases such as: "Holy", "Love,
peace, faith, hope, Jesus", "Thank God", and even “the Bible verse "John 3:16" on the
bottom of its trademark yellow bags (DUMAS, 2011). Another issue on the same year was
its "Allergic to Algebra" shirt which gave the impression that the shirt had an anti-education
theme (Ng, 2011). In April 2010, Rachel Kane, a writer and a Forever 21 customer, created
a blog with the domain name WTForever21.com. Kane posted pictures of some Forever 21
items and voiced her opinions about the clothing. The company had requested the writer
to shut the site down or else a lawsuit will follow.

Forever 21 had a good reputation, but this was plummeted down by the current
generation that doesn’t suit their taste well. H&M is facing a similar situation to Forever 21
due to its product quality and company identity as well, but the only difference it has with
Forever 21 is that they don’t aggressively take loans and expand physical large-sized stores
globally. The days of Forever 21, with its strong brick-and-mortar presence, have been
numbered thanks to the “retail apocalypse,” a threatening term used to describe how the
internet changed consumers’ shopping habits, particularly affecting chain stores.

Since 2017, decades-old American businesses like Sears, Toys R Us, Mattress Firm, and
Payless have filed for bankruptcy, a signal of how much these once-prosperous brands are
struggling to keep up with shoppers. Most of these retailers are also owned by private
equity firms which, as Forbes reports, use leveraged buyouts to purchase companies. These
buyouts burden retailers with high debt and interest that they later have to pay, making
them less profitable.

7
 MGT198 — Forever 21 Bankruptcy
•••

VI. Decision Analysis

• Toys R Us — the famous toy retailer— was once known for its plentiful racks of
games and gadgets, has emerged from the ashes: It’s rebranding new stores
as “highly interactive” play environment and preparing to open in Texas and
New Jersey in November (Toys R Us, 2019). Forever 21 can still keep up to its
game, it just needs to have a millennial bracket of marketing team members
and a fresh set of design team.

• As e-Commerce has continued to boom, traditional retailers like Forever 21has

struggled to adapt to consumer behavior. According to a March 2019 survey,
Millennials make 60% of their purchases online (Coupon Follow, 2019).
Reducing the brick-and-mortar culture and slowly shifting to a more click-and-
mortal company can lessen expenses, specifically on rent and utilities.

• Increasing Social Media presence such as in YouTube and Instagram.

Increasing millennial engagement in social media been successful as done by
Forever 21 itself, however this was only present in Instagram. Social strategies
in general can actually have a huge impact for fashion brands, and
customers actually like to hear and watch reviews of product consumption
from trusted YouTubers and Influencers (Ehlers, 2015).

• Shifting to a much more ethical operations, specifically on the labor

production of goods of the company. Standing with a good set of values are
plus points in a customer’s preference.

• Finalizing a specific line of style for the whole company, to create an identity
to the market.

8
 MGT198 — Forever 21 Bankruptcy
•••

VII. Potential Problem Analysis

• Forever 21 is known to be the retailer that occupies supersized locations. That’s
why if Forever 21 reduces more than half of its physical stores, the next problem
would fall on their landlords in finding a way to fill those spots as mall vacancy
rates are on the rise.

• Since Forever 21 is filing for bankruptcy, it will be harder to rebrand itself due
to low sources of funds, and difficulty to get investors or loans from surplus
agents.

9
 MGT198 — Forever 21 Bankruptcy
•••

VIII. Resolution / Conclusion

Forever 21 may be on the verge of its end of existence, but it’s still not. There is still
hope and time left, just like with the situation of Toys R Us where children nowadays are fully
entertained with just an iPad. The generation now is quickly revolving, and companies
need to keep up and innovating more products or styles. The company had a religion issue
in regard to the statement shirts that had Bible verses and Christian slogans but was
exposed in condoning to low labor from its outsourcing to third-world countries. If they
would develop their values internally, rather than showing externally to its customers that
they are religious, their market and sales would surely grow.

Keeping up with what customers now want is what keeps companies like Zara,
UNIQLO, Old Navy, and Gap stay to its competition. Zara has a system where they would
test if their products would trend in the market, if not, they would have to pull out the
products two weeks later and change a trendier style. Forever 21 needs to enhance their
internal issues such as operations, marketing, and design team and this chance should be
taken while they are filing for a Chapter 11 bankruptcy.

10
 MGT198 — Forever 21 Bankruptcy
•••

References
Anderson, C. (2018, January 5). Forever 21 Reports $40 Million Loss; Closes More U.K. Stores.
Retrieved from Los Angeles Business Journal:
https://labusinessjournal.com/news/2018/jan/05/forever-21-reports-40-million-loss-
closes-more-uk-/

Coupon Follow. (2019, March 19). The Millennial Shopping Report. Retrieved from Coupon
Follow: https://couponfollow.com/research/millennial-shopping-report

Debter, L., & Gross, E. (2019, July 3). Forever 21 Hits Rough Patch, Knocking Founders Out Of
Billionaire Ranks. Retrieved from Forbes:
https://www.forbes.com/sites/laurendebter/2019/07/03/forever-21-hits-rough-patch-
knocking-founders-out-of-billionaire-ranks/#3293a3cd2602

DUMAS, D. (2011, August 11). Fashion chain Forever 21 accused of pushing religious
agenda with Christian-themed T-shirts. Retrieved from Daily Mail:
https://www.dailymail.co.uk/femail/article-2025046/Fashion-chain-Forever-21-
accused-pushing-religious-agenda-Christian-themed-T-shirts.html

Ehlers, S. (2015, November 26). Forever 21 drives millennial engagement through social
media. Retrieved from Fashion United:
https://fashionunited.com/news/fashion/forever-21-drives-millennial-engagement-
through-social-media/201511269162

Kitroeff, N., & Kim, V. (2017, August 31). Behind a $13 shirt, a $6-an-hour worker. Retrieved
from Los Angeles Times: https://www.latimes.com/projects/la-fi-forever-21-factory-
workers/

Ng, C. (2011, September 16). Forever 21's ‘Allergic to Algebra’ Shirt Draws Criticism.
Retrieved from abc News:
https://abcnews.go.com/blogs/headlines/2011/09/forever-21s-allergic-to-algebra-
shirt-draws-criticism/

Nguyen, T. (2019, August 29). Forever 21 might file for bankruptcy. What does that actually
mean? Retrieved from Vox: https://www.vox.com/the-
goods/2019/8/29/20838793/forever-21-consider-bankruptcy

Toys R Us. (2019, July 18). Tru Kids BrandsTM Bringing Toys“R”Us® Stores Back to the United
States. Retrieved from Toys R Us: https://www.toysrus.com/PressRelease.html

11