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Forever 21 Said to be Nearing Bankruptcy as Trade War Adds Pressure

A cash crunch at beleaguered Forever 21 could have it filing a Chapter 11 petition for bankruptcy court protection sooner than later.

Rumblings of a possible bankruptcy filing surfaced in June, though the fast-fashion retailer has actually been the subject of much financial speculation since 2014. Cash-flow issues have dogged the teen fashion chain for years. Fortunately for founder Do Won Chang, he’s been able to find the needed liquidity in the past to keep the operation afloat—and keep control of the company to boot.

Chang’s control of Forever 21 could be slipping, however, as talks with potential lenders to restructure the balance sheet appear to have stalled. Since late May or early June, he’s been in negotiations with lenders for new financing, on the condition that he keeps control of the company. While Chang could still strike a deal that keeps the company out of bankruptcy, time and a liquidity crunch seems to be working against him.

A spokeswoman for Forever 21 did not return a request for comment by press time.

Forever 21 has roughly $500 million of debt in the form of an asset-based loan that doesn’t mature until 2022, but it does have high overhead costs connected to rents owed to landlords for its super-sized boxes.

While sources indicated this summer that the retailer’s landlords would probably be open to some concessions to work out a deal, they weren’t so sure whether lenders would be willing to put out more money to help restructure operations, particularly given past cash-flow issues and the fact that many Forever 21 stores are located in malls where teen traffic has been dwindling amid the rise of online shopping. And given the retailer’s history of late payments and lack of financial reporting, factors have long since pulled credit lines and approvals on orders placed with their clients. One fashion executive on Wednesday said many “vendors have stopped shipping orders to Forever 21 months ago.”

Compounding its financial pressures–and creating a perfect storm of sorts–is the upcoming planned tariff hikes on Chinese imports, including apparel, starting on Sunday. Forever 21 works with a number of Chinese factories for its merchandise. Some fashion sources believe the higher cost of doing business due to the impact from tariffs and uncertainty over the ability to pass along the increased costs to millennial and Gen Z shoppers, are factors that hurt a retailer in the midst of restructuring a balance sheet that’s already financially pressured.

Bloomberg first reported Wednesday afternoon that the restructuring focus had shifted to securing a potential debtor-in-possession financing facility in the event the retailer filed a Chapter 11 petition.

Chang and his wife Jin Sook co-founded the chain in 1984 and have grown its store base to more than 700 locations globally, selling fashion and accessories to men, women and kids. While many doors are located in A, B and C-rated malls, they also operate grand scale stores that average 40,000 square feet. Forever 21 operates its outlet-style concept F21 Red, too, where prices for classic leggings are $5.90 and skinny jeans can be priced as low as $7.90.

While Forever 21 still has its fans, a bankruptcy filing would at least let the company shed much of its leases and cut back on overhead costs.

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