#144. Every week on the podcast we’ll challenge a recently-announced business strategy to understand the upside and downside of the brand’s approach. We discuss Simon and Brookfield’s decision to buy Forever 21 out of bankruptcy and whether or not the brand is worth reviving. 

Check out the full transcript below. 

Richie: [00:00:00] Welcome to the Loose Threads Podcast, where we challenge a recently-announced business strategy to understand the upside and downside of a brand’s approach.

Richie: [00:00:09] I’m Richie Siegel, the founder of Loose Threads, which analyzes and advises next-generation consumer companies, and FaceLift by Loose Threads, a retail incubator and accelerator for leading brands and retailers. For our latest analysis and insights, check out our free weekly newsletter at LooseThreads.com.

Richie: [00:00:25] Joining me for our discussion this week is Rebekah Kondrat, a partner at FaceLift by Loose Threads, and Caroline Tibbetts, who leads our research at Loose Threads. This week, we analyze the decision by mall owners Simon and Brookfield to buy Forever 21 out of bankruptcy for $81 million. The brand is an existential risk to many landlords, who rely on the company to both fill space and bring in young shoppers. But, in an era that increasingly considers fast fashion an unsustainable relic, is a brand even worth reviving? Here’s what we thought.

Rebekah: [00:00:58] Would I buy Forever 21? No. So there are a couple of problems, but I think, just when you think about the whole fashion landscape—specifically the fast fashion landscape and how there’s a very negative connotation attached to it now, in particular—the up-and-coming buyers are not trying to purchase disposable clothing. In fact, they’re trying to purchase previously-used clothing, so that less goes into landfills. Companies with sustainability in their model are faring better than these fast fashion brands. I think that those things kind of make it a very tough sell.

Caroline: [00:01:36] But what if you bought the brand and you incorporated those aspects into the brand? Resale, maybe you steered away from fast fashion a bit. You invested further in the brand to modernize it.

Rebekah: [00:01:48] So let’s think about what it would take to actually do that, because this is known as “disposable clothing” for a reason. The quality just simply isn’t there. Realistically, in order to incorporate, say, like some sort of rental into the brand, you would have to increase the quality of the clothing, which would take probably finding new suppliers, sourcing new fabrics, potentially overhauling your logistics a little bit. And then there’s the whole brand image that it’s just known as “fast fashion,” disposable clothing. I mean, the name is Forever 21, so their target is 21-year-olds, about?

Richie: [00:02:28] And younger.

Rebekah: [00:02:28] But the truth is, the 21-year-old of today is not the same 21-year-old that existed when Forever 21 came out. I think it is important to recognize the changes that have happened in consumer behavior.

Richie: [00:02:44] So I think it’s pretty telling that the brand had 350 stores and was sold for $81 million, which is like, so…nothing. I wouldn’t buy it, and even if I was a mall landlord, I still wouldn’t buy it.

Rebekah: [00:02:58] Well, I guess, for me, the question is, “What do you buy?” So you could buy the name, the brand, right, and then make it something else. You could buy the inventory, but I think we’ve kind of established that that’s—

Richie: [00:03:08] One of their hugest problems, that got them here.

Rebekah: [00:03:12] Completely. I guess maybe you could purchase the designs, some sort of intellectual property. But even that, like, their designs are not so unique that they’re recognizable as Forever 21 designs. It’s not—this isn’t like DVF that we’re talking about here.

Caroline: [00:03:24] No, but I think the mall owners aren’t creative. They’re not product people. They’re just looking for a quick fix. So if I were Simon right now, as of today, I would probably buy them. As you said, the $81 million, it’s not that much. It would buy me a short term solution to figure out what I would do with those empty spaces. Because, otherwise, what is going to fill them? Are DTC brands going to start popping up in middle America malls?

Rebekah: [00:03:51] Right. So I think the mall angle and question is a really interesting one, because if the goal of the mall landlord is just to not have vacancies, then yes, this solves that problem in the very short term. But if the goal of the mall landlord is to actually figure out how to make their business sustainable before they go the way of the bookshop, then this does not fix that. And wouldn’t they do better to try something innovative?

Richie: [00:04:18] So, it’s Brookfield and Simon together are buying the brand as some sort of consortium, right? ‘Cause I think they were the two largest landlords that Forever 21 had stores in. They have to run the brand now, which sounds like a terrible exercise to do. I mean, if it got to the point where you basically went from $4.4 billion in revenue and that was basically worth $81 million, to build that up into something worthwhile again is a monstrous task with a brand, as you said, that has minimal relevance to people shopping today, with a product assortment that is derivative and underwhelming compared to what you can find at Zara and H&M if you wanna go do fast fashion. I just don’t know why you want that on your hands.

Richie: [00:04:54] Now, I fully understand, okay, Forever 21 probably represents tens of millions of dollars, if not hundreds of millions of dollars of leases over ten year periods in these centers. I guess you have nothing to lose beyond your time? But if the brand isn’t profitable—’cause I think it had a lot of debt. If you had like a $4 billion revenue brand and it was making $2 billion of cash, and you could just literally use that cash to pay the leases that are now yours, effectively, that makes sense. But I’m pretty sure the brand wasn’t profitable. It had debt on it as well. And so, they’re just like, taking on more and more obligations, even though, sure, you can get rid of the debt obligations and bankruptcy. It seems like a monstrous task.

Rebekah: [00:05:38] I know that in the grand scheme of what these mall landlords deal with, $81 million is not that much. And so, as you say, it’s kind of low-risk. But what else could you do with $81 million? I mean, it’s to be seen if the kind of Mall of America, American Dream Mall model work. And, of course, the capital expense to build those monsters is significant. But, if that is the future of the mall, then why would you spend any resources, no matter how small, putting this band-aid solution on there?

Richie: [00:06:11] Part of that money, too, is still the landlord paying for the build-out.

Rebekah: [00:06:14] Right.

Richie: [00:06:14] It’s so intertwined, in a sense. Which, again, from one perspective makes sense of like, “Oh, we just have to save the ship. We’re drowning.” But, in the other sense, the risk of you drowning more is way higher, because you’re now moving money from one pocket to the other.

Rebekah: [00:06:28] Yes. You just squeeze the lid and it pops out the other side. Like, that’s all that’s happening.

Richie: [00:06:32] So it’s actually interesting. Like, do Simon and Brookfield have a long term incentive to actually make the brand work? Or are they just incentivized to make the brand work as long as their leases go, and then just basically trash it? ‘Cause all they really care about, right, is just getting as much of the lease payments as they’ve been promised is possible. But realistically, after you go through all the terms of those leases, like, do you really want to resign this brand, even though you own it?

Richie: [00:06:55] It’s almost like the discount version of what Related does with Equinox and SoulCycle, where like, Related buys the real estate underneath these places and puts their own brands in them, so they can basically move money from one pocket to another. So like, Related owns all the real estate where Equinox is, where SoulCycle is, where Rumble is, etc., and it’s like, very much a vertically-integrated model. Versus this is like, the backside of that, where Simon and Brookfield are adding Forever 21 to the portfolio, fully because it serves their own short term need, which is to prop up the leases that Forever 21 can’t pay.

Rebekah: [00:07:28] But, in doing so, devalues their properties.

Richie: [00:07:31] A hundred percent.

Rebekah: [00:07:31] Because of the perception of these brands.

Richie: [00:07:35] Yes, from a brand perspective. I think, again, in the short term, from what I know about real estate, like, they have to keep their occupancy rate up for their stock price to stay afloat. And so, they just want to be able to say, “Yeah, these 400 stores, or 300 stores,” of which I’m sure a majority of them are in the Brookfield and Simon centers, “They’re not closing. We can keep them open. It’s not gonna kill our comps for the center, and the number of stores open and the occupancy rate.” But, again, the reasoning behind it is the opposite of what Related and Equinox do, which is to actually like, build a vertically-integrated company, when I think Simon wants to be a real estate company, I think Brookfield just wants to be a real estate company. They don’t really wanna be running brands.

Richie: [00:08:11] The question I would then ask is: of all the brands that you could buy, it would seem that a Macy’s, a Bloomy’s or whatever is way more problematic for a Simon or Brookfield than a Forever 21. ‘Cause if you look at those are the anchor tenants, basically, so the chance of Macy’s going down—I think it was the worst-performing stock in the S&P 500 last year. That seems way more consequential of like, anchor-level space than a Forever 21. I don’t know, it’s a ten or a 20-thousand-square-foot store versus a hundred thousand square feet or so forth. And, again, okay. The answer is, well, Forever 21 cost $80 million to buy, Macy’s costs however many billion. But from a capital perspective, it would seem that the risk from a Macy’s is way more problematic than the risk from a Forever 21.

Caroline: [00:08:59] I thought of that, based on the space that you mentioned, but it’s the customer that it’s bringing in.

Richie: [00:09:05] The younger customer?

Caroline: [00:09:07] The younger customer. And who replaces them? What other fast fashion major chains exist? There was Charlotte Russe who faced bankruptcy earlier this year, but I think the Macy’s customer—I mean, Macy’s isn’t cheap. There aren’t a lot of fast fashion options at Macy’s. And now Sears is gone, Sears used to be a major anchor and take up that business and have the fast fashion business too. But I think these are the people that are going to the malls, despite culture changing and like, getting dropped off at the malls the way that we may be used to, that still exists to some extent, I think, throughout the country. So if Forever 21 is gone, you’re really losing that customer group, from going to the Macy’s to maybe buy their makeup after the fact.

Rebekah: [00:09:54] Okay, but you could put something else in there that would serve that core customer group for the long term. So I agree that there is a demographic that would purchase this clothing because of the price point, and you definitely want them in your malls because they bring their parents and they spend money elsewhere and yadda, yadda. But as soon as they actually get to the point where they can afford to not buy Forever 21, they’re stopping. So wouldn’t it be better if they put something else that would keep them for the long term, whether it’s a D2C brand or whether it’s something totally different and experiential like, what…

Richie: [00:10:30] Museum of Ice Cream, or…

Rebekah: [00:10:31] Right. Museum of Ice Cream or Color Factory or, you know, something that brings them in and doesn’t have those negative connotations toward fast fashion filling landfills, that this up-and-coming generation is very much paying attention to.

Caroline: [00:10:48] I agree. And I think experiential retail is a great idea. I think Simon and Brookfield have mentioned a lot of experience of things that have been over the top and kind of like, off brand for a shopping center in general. But yes, Museum of Ice Cream would be great. However, I know we’re referencing Forever 21 for this group of tweens or teens, but it really, fast fashion is bought by people 15 to 80. And the only other option of that price point would be something like a TJ’s or a Marshall’s. However, they’re never gonna move in there, because they don’t need the malls at all to deal with that. So what type of product or brand could move in there that is affordable fast fashion, if you will? The new age sustainable fast fashion.

Richie: [00:11:33] It makes me think of like, a Dolls Kill or something, which some people call like, a “Coachella Music Festival brand.” But they’ve been growing really quickly. I mean, Fashion Nova’s the other one that is huge but has a ton of issues with worker sustainability and so forth, and I think is all e-comm anyway, so they don’t really have any expertise to go into physical retail. But Dolls Kill has a few stores. They recently, I think, just raised some more money. I would assume they’re a $50 million-plus, under a hundred million dollar brand.

Richie: [00:11:59] It’s hard because, again, it’s like, $81 million, which, to these companies is literally nothing relative to the risks they have on the line of these stores going vacant. But fully agree that like, this is a like, one-to-five-year solution, versus a five-plus-year solution of—the brand just doesn’t really mean much anymore. I mean, Forever 21 sales were dropping 20%, year over year. 20% of a three-to-four-billion-dollar business is so much money. I understand, obviously. They’re in bankruptcy. They had $500 million in debt, they tried to wipe that out. They have leases which, I guess they can’t really get out of now, although they’d be negotiating against themselves, because the landlords now own the brand, which is weird. But 20% year over year, that goes to zero real quick.

Richie: [00:12:41] So, does Forever 21 drop to like $1.5 billion in sales maybe? Or even lower? Like, I don’t think that’s out of the picture, in a sense, given they’ve been declining so much. It’s all the mall’s problem now.

Rebekah: [00:12:52] The thing that I would be asking myself if I were a mall owner is, “Is it cheaper to learn the lesson now?”

Richie: [00:12:58] I think, is it just better to bite the bullet now, knowing that the longer term impact is only going to be worse? Versus, “Let me just figure out what I need to do now for the larger vision of the business.”

Rebekah: [00:13:09] Right.

Richie: [00:13:10] Bose is closing all its stores. They’re not gonna go buy Bose. Charlotte Russe is closing, they’re not gonna buy those. What other…

Caroline: [00:13:16] Papyrus just recently closed. Those are in malls.

Richie: [00:13:18] Papyrus. You know, Bath & Body Works’ future’s a little up in the air, given L Brands is gonna try and spin off Victoria’s Secret. Like, they can’t just buy them all. Or, I mean, I guess they could. That would be, I think, a terrible idea.

Caroline: [00:13:29] But my question would be—and I don’t think this is published out there—but like, if landlords could look at what stores brought in the most traffic, I would not be surprised if Forever 21 is in the top ten of all of their malls. And they’re thinking of it from a traffic perspective. But I agree with you. I think it’s better to rip off the Band-Aid now for anything. But, at the same time, they’re looking at that and saying, “Okay. This percentage of our customers go into that store. Without it, we lose that.”

Richie: [00:13:59] I think we all agree that it isn’t like they’re looking at the numbers wrong, per se. It’s more of a strategic question of, do you just face the music now, or do you wait a few years and like, try to get a handle on it? When I think again, directionally, we all know where the space is going.

Rebekah: [00:14:14] Knowing how not creative the mall landlords are, I think that there are replacements for that traffic. ‘Cause you have a good point. Traffic is a really good point and it’s very, very important. I mean, it’s how they get tenants. But I think there are other things that you can do to push that traffic into the malls that don’t involve purchasing an egregiously under-performing, negatively-viewed brand.

Richie: [00:14:43] Thanks for listening to Espresso, a Loose Threads Podcast. You can read full transcripts of the podcast and join the newsletter at LooseThreads.com. Feel free to leave a review on iTunes, we always appreciate it, and thanks to George Drake, Jr. for editing this episode. We’ll be back with more.