Shopping center operators have just bought Forever 21. Now what?
Struggling clothing retailer Forever 21 is set to become jointly owned by mall operators Simon Real Estate Group (GPS 0.39%) and Brookfield Property Partners LP (BPY) for the modest sum of 81 million dollars. The fast fashion company declared bankruptcy in September and hoped to benefit from an auction of its own on Monday. But no other interested parties submitted a bid, so the consortium of two retail owners and a brand manager is the de facto winner, unless the presiding judge decides. other. Buyers will also inherit at least some of Forever 21’s debt, though much of that debt is to themselves, for lease payments.
It’s a risky proposition for the obvious reason — Brookfield and Simon Property run shopping malls, but a consumer retail is something else entirely. A handful of analysts are also skeptical, while others note that Simon and General Growth Properties (later acquired by Brookfield) managed to bail Aeropostale out of trouble after buying it out of bankruptcy in 2016.
Forever 21 is not Aeropostale, however, and for the mall-owned retailer premise to gain credibility, very specific things will have to happen from here.
How Forever 21 got into trouble
Some of the pain that privately held Forever 21 has suffered in recent years can be attributed to the industry’s headwind, often referred to as the retail apocalypse. Some of the blame, however, must also be placed at his own feet.
Consider Forever 21’s aggressive physical growth in the wake of the 2008 recession, which put it on a collision course with the internet as a means of shopping for clothes. September’s bankruptcy announcement indicated the company could close up to 350 of its 800 stores, many of which were simply too big to support themselves.
The retailer also found itself somewhat unsuited to the fast fashion era, with too much merchandise and square footage to move quickly.
Fortunately, the path to redemption is reasonably well-defined, consisting of three key pillars. Unfortunately, as Simon Property chief executive David Simon was willing to concede, saving Forever 21 will be “a little more complicated and a little bigger” than turning Aeropostale around.
The turnaround platform
Brookfield and Simon shareholders can take comfort in knowing that both REITs will buy Forever 21 for one song. But given the additional time, effort and capital that may be needed to revive the clothing chain, the consortium can’t afford to go wrong and subsequently risk eating away at its rental property cash flow. Investors will want to look for progress on three fronts.
1. More e-commerce
Of Forever 21’s estimated annual revenue of $2-3 billion, only 16% is generated by e-commerce. This is below the industry average.
However, improving online sales is not just an opportunity to add additional revenue. A more powerful e-commerce machine is also a pedestrian traffic driver to stores, where shoppers can make additional purchases. Consumer research firm Invesp reports that 75% of shoppers who make an online purchase to be picked up at a store say they are likely to buy something else once there.
2. Smaller and fewer stores
Bankruptcy Proceedings Should Eliminate Number of Forever 21 Stores; Brookfield and Simon will just have to deal with a loss of rent. With the remaining stores, however, there is always the issue of size. The average location is nearly 40,000 square feet, and most cover at least 10,000. The average store’s sales don’t justify that much space.
The solution to the problem is simple, but messy. Forever 21 can revamp its spaces in malls, returning the unused portion to landlords – which in this case are still largely Simon Property and Brookfield Property Partners. Such renovations are expensive, but a a small store is better than no store to attract new tenants to shopping centres.
3. Better stock selection
Finally, the failure of Forever 21 is a reflection of the company’s poor inventory management. Dave Bruno, director of retail market insights for Aptos, commented a week ago: “Assortments will make or break Forever21 in the future. Store size will definitely be an issue, but they have to work first. to adapt their assortments to changing consumer trends — and perhaps expand their core customer segments.”
Cathy Hotka, director of Cathy Hotka & Associates, agreed with the sentiment, saying during RetailWire’s virtual roundtable that “Forever 21 has two major issues: inventory issues (imagine an entire store where the only size available is XS) and the belief that its customers are all teenagers. New owners…will have to start there.”
The new normal in mall retail?
No fix will go into effect overnight, though the improvements should ideally start to become evident well before this year’s busy holiday shopping season.
However, there’s a lot more going on here than two mall owners simply rescuing a tenant and hopefully collecting the more than $13 million the clothing chain owes them both. This agreement could end up completing the validation of mall-owned retailers that Aéropostale’s ownership has set in motion. Granted, real estate investment purists won’t like the merging of landlords and tenants, but if the model works, don’t be surprised to see more deals like this.