By Skyler Shields
“Forever 21 is closing! Where am I going to get my clothes?” exclaim shoppers across the United States. Luckily, the answer is that you can probably still get your clothes where you used to – Forever 21. On September 29, 2019, Forever 21, the fifth largest specialty retailer in the United States,[1] announced it was filing for bankruptcy.[2] Many Americans mistakenly believe that filing for bankruptcy is synonymous with going out of business. Often times however, this is not the case.[3] Forever 21’s bankruptcy announcement for example, stated that stores will “[e]ssentially . . . to continue to operate . . . as usual.”[4] The question then becomes: how can a bankrupt business continue to operate its stores as usual?
The United States is currently in the middle of the “retail apocalypse.”[5] Since 2015, retailers have been filing for bankruptcy in mass.[6] This apocalypse has slain well-known brands such as Aeropostale, American Apparel, Charlotte Russe, Gander Mountain, Mattress Firm, PacSun, Payless Shoes, rue21, Sears, Toys “R” Us, and now, Forever 21.[7] Some of these companies have successfully emerged from bankruptcy.[8] Others have not.[9]
Under federal bankruptcy law, a company may file for bankruptcy under either Chapter 7 or Chapter 11.[10] Under Chapter 7, a company ceases operations, liquidates its assets, and goes out of business.[11] Under Chapter 11 however, a company may continue to run its day-to-day operations while attempting to return the business to profitability.[12] Thus, by announcing it was filing for Chapter 11 bankruptcy, Forever 21 essentially announced it would continue operations while attempting to return the business to profitability. Fashionistas rejoice.
To continue operations post-Chapter 11 filing, a company must develop a reorganization plan to get the business out of debt which the company’s creditors, bondholders, and stockholders must accept.[13] Ultimately however, a court can confirm the plan without the creditors, bondholders, and stockholders approval.[14]
Of course, a company’s reorganization plan prompted by filing Chapter 11 bankruptcy does not guarantee a business’s long-term survival. To avoid liquidating the company’s assets and ceasing operations, a company must return to profitability.[15] A company may attempt to return to profitability by using one of two established strategies: (1) prepackaged plan; or (2) Sales and Liquidation (freefall bankruptcy).[16] A prepackaged plan is a Chapter 11 bankruptcy plan where the company and its main creditors agree to bankruptcy terms before filing.[17] Freefall bankruptcies are more common than prepackaged plans.[18] Freefall bankruptcies occur when a company files a Chapter 11 bankruptcy aiming to sell the companies’ assets and liquidate.[19] Companies have successfully implemented both of these strategies.
Indeed, not all Chapter 11 bankruptcies successfully return the company to profitability. In September 2017, Toys “R” Us filed for bankruptcy.[20] At the time, this was the third largest bankruptcy in United States history.[21] Toys “R” Us filed under Chapter 11 hoping to transform the company before the holidays, returning the company to profitability through a strong holiday season performance.[22] Come Christmas however, instead of presents under the tree, Toys “R” Us found a lump of coal – their holiday performance was not enough to return the business to profitability.[23] Accordingly, in March 2018, Toys “R” Us announced it would be closing all of its stores.[24] Its attempts to save the business through Chapter 11 failed.
Typically, companies file for Chapter 11 bankruptcy hoping to sell and liquidate the company or its assets.[25] Under Chapter 11, the company can continue to operate many of its locations while looking for a buyer for some or all of its business. In March 2017, Gander Mountain announced it was filing for Chapter 11 bankruptcy.[26] It also announced it would be closing 32 of its less-profitable stores.[27] The company hoped to continue its profitable operation while searching for someone to buy the company.[28] Ultimately, Camping World bought the business at a foreclosure auction.[29] Since then, Gander Mountain has re-branded and become Gander RV &Outdoors, focusing on profitability in each and every store.[30] Today, Gander RV & Outdoors operates 77 locations in 23 states under the Gander name.[31]
In some circumstances, companies are able to quickly navigate bankruptcy via a prepackaged plan. Using a prepackaged plan, a company and its major stakeholders negotiate and agree to bankruptcy terms before filing.[32] Prepacked plans allow companies to continue operations; negotiate financing and operations plans; and quickly enter and exit bankruptcy, saving valuable time and money.[33] On October 5, 2018, Mattress Firm filed for Chapter 11 bankruptcy.[34] A little over a month later, on November 11, 2018, Mattress Firm exited bankruptcy.[35] Through its prepackaged plan, Mattress Firm obtained around $525 million in financing to support its operations post-bankruptcy.[36] Additionally, Mattress Firm announced in its bankruptcy plan that it would be closing up to 700 of its less-profitable locations.[37] When Mattress Firm exited bankruptcy, the company maintained operations in around 2,600 locations throughout the United States.[38] After emerging from bankruptcy, Mattress Firm’s executive chair, president, and CEO stated the company emerged a “stronger and more competitive company.”[39]
Forever 21 appears
to be attempting a prepackaged bankruptcy. The company certainly has no intentions of
going out of business – making this explicitly clear in its bankruptcy
announcement.[40] To date, Forever 21 has acquired $350 million
in financing from its existing lenders and new capital providers.[41] This suggests a prepackaged bankruptcy similar
to Mattress Firm’s. Additionally, like
Mattress Firm, Forever 21 announced a plan to close it’s less profitable stores
while continuing operations in the remaining stores.[42] Gander Mountain however, did much the same
thing in its freefall bankruptcy. Moreover,
unlike Mattress Firm, Forever 21 did not announce an expected bankruptcy time
frame.[43] The lack of a time frame casts doubt on Forever
21’s ability to quickly exit bankruptcy, a hallmark of prepackaged
bankruptcies. Ultimately, Forever 21 is
likely attempting some sort of prepackaged bankruptcy since it has already
received financial contributions and does not to appear to be actively shopping
for buyers. Only time will tell what
the future holds for Forever 21. For
now, it will continue on as usual – sans a few stores of course.
[1] Forever 21, About Us, https://www.forever21.com/us/shop/info/aboutus (last visited Oct. 4, 2019).
[2] Forever 21, Letter to Our Customers (Sept. 29, 2019), https://www.forever21.com/us/shop/info/lettertoourcustomers.
[3] See CB Insights, Here’s A List Of 68 Bankruptcies In The Retail Apocalypse And Why They Failed (Mar. 12, 2019), https://www.cbinsights.com/research/retail-apocalypse-timeline-infographic/ (listing various companies who successfully emerged from bankruptcy).
[4] Forever 21, supra note 2.
[5] CB Insights, supra note 3; Johnathan C. Bolton, Surviving the Retail Apocalypse: Commercial Lease Issues in Bankruptcy, Haw. B.J., Feb. 22, 2018 at 4.
[6] See CB Insights, supra note 3 (listing 68 retailers who have filed for bankruptcy since 2015).
[7] Id.; Forever 21, supra note 2.
[8] See CB Insights, supra note 3
[9] Id.
[10]SEC, Bankruptcy: What Happens When Public Companies Go Bankrupt (Feb. 3, 2009), https://www.sec.gov/reportspubs/investor-publications/investorpubsbankrupthtm.html.
[11] Id.
[12] Id.
[13] Id.
[14] Id.
[15] See Id.; CB Insights, supra note 3 (explaining that companies, such as Payless, who fail to make profits are forced into bankruptcy again, often going out of business).
[16] Robbin Rahman, The Retail Crisis Continues: What the Biggest Retail Bankruptcy Cases of 2017 Tell Us About 2018 and Beyond, Ark. Law., Spring 2018, at 25, 26.; Bankruptcy: Overview of the Chapter 11 Process, Practical Law Practice Note Overview 4-380-9186 [hereinafter Chapter 11 Practical Law Note].
[17] Id.
[18] Bankruptcy: Overview of the Chapter 11 Process by Practical Law Bankruptcy & Restructuring and Practical Law Finance
[19] CB Insights, supra note 3.
[20] Id.
[21] Id.
[22] Id.; Ben Unglesbee, One Year Later: Toys R Us’ Fatal Journey Through Chapter 11, Retail Dive (Sept. 18, 2018), https://www.retaildive.com/news/one-year-later-toys-r-us-fatal-journey-through-chapter-11/532079/.
[23] CB Insights, supra note 3; Unglesbee, supra note 22.
[24] CB Insights, supra note 3.
[25] Rahman, supra note 16 at 26; Chapter 11 Practical Law Note, supra note 16.
[26] CB Insights, supra note 3.
[27] Tribune & News Services, Camping World Wins Gander Mountain Bankruptcy Auction, Chi. Trib. (May 1, 2017), https://www.chicagotribune.com/business/ct-camping-world-gander-mountain-bankruptcy-20170501-story.html.
[28] Id.
[29] CB Insights, supra note 3.
[30] Daphne Howland, Gander Mountain Back from Bankruptcy as ‘Gander Outdoors’, Retail Dive (Dec. 14, 2017), https://www.retaildive.com/news/gander-mountain-back-from-bankruptcy-as-gander-outdoors/513043/.
[31] Gander RV & Outdoors, Store Locator (last visited Oct. 3, 2019), https://www.ganderoutdoors.com/store-locator.
[32] Need for Speed: Pre-Packaged and Pre-Negotiated Plans, 070810 ABI-CLE 335 (July 8, 2010).
[33] Rahman, supra note 16 at 25.
[34] CB Insights, supra note 3.
[35] Bed Times News Desk, Mattress Firm Makes Quick Bankruptcy Exit, Bed Times (Dec. 10, 2018), https://bedtimesmagazine.com/2018/12/mattress-firm-makes-quick-bankruptcy-exit/.
[36] Id.
[37] Id.
[38] Id.
[39] Cara Salpini, Mattress Firm to Exit Bankruptcy ‘In the Coming Days’, Retail Dive (Nov. 19, 2018), https://www.retaildive.com/news/mattress-firm-to-exit-bankruptcy-in-the-coming-days/542595/.
[40] In its letter to customers, the company stated “[t]his does NOT mean that we are going out of business.” Forever 21, supra note 2.
[41] Richa Naidu & Aishwarya Venugopal, Forever 21 Closing Stores in Bankruptcy Filing Shows Limits to Fast Fashion, Reuters (Sept. 29, 2019), https://www.reuters.com/article/us-forever21-bankruptcy/forever-21-files-for-bankruptcy-idUSKBN1WF043.
[42] Forever 21 plans to close up to 178 of its 549 U.S. stores. Globally, Forever 21 expects to close up to 350 of its stores. Nathaniel Meyersohn & Chris Isidore, Forever 21 Files for Bankruptcy and Will Close Up to 178 US Stores, CNN (Sept. 30, 2019), https://www.cnn.com/2019/09/29/business/forever-21-bankruptcy/index.html.
[43] See Forever 21, supra note 2.
