The ‘Forever Perplexing’ Bid

‘Forever 21’ stepped in as the first bid 149 Mervyn’s stores. This is bizarre on many levels. If it goes through, there’s impact on several others due to competitive overlap.

For those that do not know Forever 21, it is a fast-fashion retailer targeting trendy teens and 20-somethings (but as usual skews higher). The product sells at prices up to 80% off comparably designed product elsewhere in the market. Is the quality the same? No way. But the customer is one that buys the product, wears it 5 times, and then uses it as a car wash rag.

This has ‘disruption’ written all over it. Consider the facts.

1) Forever 21 has 430 stores, and is looking to buy 149 new ones. This is a lot to digest.

2) Mervyn’s average store size was 80,000 square feet, while Forever 21’s stores are 10-20,000 sq ft. It has one larger format flagship store – but even that is only 40,000 feet. Expertise here in mega-box formats is nil – and launching 149 at once? What are they thinking?? Maybe the plan is to partition off half the store and sub-lease, but that’s not my read thus far.

3) Note that this company’s past acquisitions have been smaller in size. It bought both Gadzooks and then 44 Rampage stores from Charlotte Ruse in 2005.

4) Korea funding what the US market can’t. I don’t see how the company can afford this on its own. This is a small growth retailer with about $1.3bn in revs, $200mm in EBIT, and not a whole lot of free cash to speak of. With such poor accesses to capital, how is this possible?? We can’t even hide behind the ‘lease everything’ argument, because 60% of the real estate is owned. Unless there’s a complex sale-leaseback transaction, this thing will be tough to fund. I guess that’s where support from Korea comes in. That’s where CEO Do-Won-Chang founded (and funded) the chain as the first store’s Clerk, Janitor, Buyer, and Salesman (credit where it’s due to his success). That checkbook in Korea runs deep…

5) Who can be impacted? Check out the pic below. We ran the analysis on what percent of each retailers’ stores fall in a 1, 3 and 5 mile radius to one of the Mervyn’s stores. We included footwear retailers – as 15% of Forever 21’s sales come from (extremely inexpensive) footwear (look out DSW). The bottom line is that Wet Seal, Ross Stores, and DSW have the greatest overlap. Aeropostale, American Eagle and JC Penney are next in line.