Will Forever 21s Looming Bankruptcy Affect Your REIT?

Summary

• Forever 21 has closed several of its European stores in the past few years.
• Industry analyst predicts a 20% or 25% drop in sales last year, as noted by Forbes.
• Bloomberg reports that the company is preparing to file for bankruptcy.

Forever 21 through the years 

Listed among the top 5 retailers in the United States, the privately owned Forever 21 has seen remarkable growth over the past 35 years.

The company opened its first store in Los Angeles in 1984 and went on to open a new store every 6 months- accumulating$700,000 in sales in its first year.

They went on to open over 800 Forever 21 stores throughout the United States, Canada, China, Europe, Japan, Korea, United Kingdom, Hong Kong, India, Israel, Latin America, Mexico, and the Philippines.

Lately however, the retail giant has taken a hit—struggling in some of its key shopping locations leading to several store closures.

The company’s accounts from December 2015 to February 2016 showed dwindling performance in Britain.

• Post-tax loss surged by 75% (from £16.6 million to £29 million).

• Trading margins decreased from 46% to 45%

• Turnover from continuing operations fell from £53.86 million to £46.05 million.

Issues such as declining customer traffic to stores, one-off costs occurring during the specified period, higher pricing markdowns and inimical developments in the supply chain contributed to the declining performance in Britain.

Forever 21 has also experience struggling sales in North America as well, which has also led to store closures in that region in the past few years.

This is a radical change from 2013 when Forever21 was drastically expanding its locations.

At the time, Gap, American Eagle, Abercrombie & Fitch, Aeropostale and other major players in the teen retail market were on high alert. Their profit margins and revenues weredwindling, while Forever 21’s ‘fast fashion’ model was making them a fortune.

The company sold its clothing at much cheaper costs than its counterparts, and expanded hier customer base from just teens to include an older demographic —also incorporating male clothing into their line along with accessories, and even home décor. This made for a winning combination.

However, in recent years things started to take a turn for the worse. While the privately- owned company hasn’t released its latest financials, it is presumed that in 2018 sales dropped by 20% or 25%.

Forever 21 is not the only company affected by the now struggling retail industry; many popular retailers have locked up shop in recent years.

The declining Retail industry

In the past year, 5994 store closures were announced. One reason for this issue is the change in consumer demand and behavior. Millennials are no longer interested in what these stores have to offer; they have grown up and their taste have changed!

Earlier this year, Nine West, Claire's, and Toys R Us all filed for bankruptcy. Charlotte Russe also filed for bankruptcy protection and later closed all locations. Other popular retailers such as Abercrombie and Fitch, Guess, Wet Seal, The Limited and American Apparel have closed a minimum of 60 locations each.Furthermore:

• Payless shoes will close all 2500 of thier stores.

• Victoria’s Secret announced it will close 52 locations.

• Abercrombie & Fitchclosed 29 locations in 2018 and will close 40 more this year.

• Gap Inc will reportedly close 230 stores between 2019 and 2020.

Since many consumers are now opting to shop online, physical stores with their associated costs-- rent, employees, overhead fees have simply become too expensive.

The decrease in foot traffic

The decrease in foot traffic has caused many companies to ditch the physical space and take their businesses online, leaving property owners scrambling to lower rent and renegotiate lease terms in an attempt to recoup some of their costs.

Source: CNBC

Lower rent, or even worse, empty shop spaces subsequently means lower rates for your REIT payouts!

Real estate investment trust (REIT) 

We’ve narrowed down some of the companies who will be directly affected by the Forever 21 store closures; Simon Property Group will take the biggest hit since they currently rent 101 properties to the company.

Simon property real estate is the largest shopping mall operator in the United States, and the largest retail real estate investment trust.

Source:media.thinknum

The bankruptcy filing by Forever 21 has already affected Simon Property Group Inc, whose stocks fell to 3-year lows as of August 30. Yahoo Finance notes that the company’s shares have declined to $148.94 on Aug. 30, which is only 2.4% above the 3-year low of $145.42.

Simon Property Group Inc. reported their second quarter 2019 financial results on July 31. Net income for the quarter was $495.3 million, or $1.60 per diluted share. However, the same quarter the prior year showed $547.0 million, or $1.77 per diluted share.

Additionally, funds from operations showed $1.064 billion, or $2.99 per diluted share, compared to $1.061 billion, or $2.98 per diluted share, during the same quarter prior year.

Source: Yahoo Finance

U.S. listed REITs have an equity market capitalization of more than one trillion dollars.

Since dividends are paid out based on generating income from leasing space and collecting rent. It’s fair to assume that if Forever 21 closes its stores the affected companies will generate less income and REIT payouts will decrease as a result.

Furthermore, reports of the impending bankruptcy filing have already affected the stocks of Simon Property Group Inc as seen in the chart above.

General Growth Properties (GGP), also has high stakes in the impeding bankruptcy as they currently rent 70 properties to Forever 21. In 2018, shares of their mall focused REIT plunged due to concerns about the declining retail industry and its effect on mall occupancy and lease rates.

And with the recent news regarding Forever 21s impending bankruptcy filing, it’s fair to assume that REITS associated with the property companies listed will indeed be affected negatively.

Do you have REITS in any of the companies listed above? Share your opinion in the comment section below.