A Hidden Cause Of The Retail Apocalypse

The ability to get out of leases and close stores at lower cost is a key advantage that the bankruptcy process affords to retailers. 

Linda Chang, executive vice president for the company, said in a news release that filing for Chapter 11 bankruptcy is "an important and necessary step to secure the future of our Company, which will enable us to reorganize our business and reposition Forever 21." 

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The retailer is just the latest to run into trouble amid the rise of online shopping that has cut foot traffic to malls and brick-and-mortar stores. High debt levels and rent costs have also burdened traditional retailers. In recent years, even healthy retailers have closed stores and struggling ones have filed for bankruptcy. "Retailers relying on debt to finance their growth have always been particularly susceptible to slowdowns," said Greg Portell, lead partner in the global consumer and retail practice of retail consulting firm A.T. Kearney. 

So far this year, retailers in the United States have announced more than 8,200 store closings, already exceeding last year's total of 5,589, according to Coresight Research. Payless and Gymboree both filed for bankruptcy for a second time, closing nearly 3,000 stores between them. Further retail shutdowns are expected to pile up and may reach 12,000 by the end of 2019, Coresight predicts. . . . 

Traditional brick-and-mortar retailers that specialize in selling clothes to teens and young adults have struggled in recent years, as fashion cycles shorten and younger buyers shift from the mall to online purchases. . . . 

Wet Seal, American Apparel and Delia's filed for bankruptcy and closed all their stores during the last five years. Aeropostale filed for bankruptcy in 2016 but has kept some stores open. Charlotte Russe also filed for bankruptcy this year. 

Many retailers have run into trouble after being purchased by private equity firms or hedge funds, which piled on debt. Forever 21, by contrast, is still owned by its founders.

From CNN.

Online retailing is one of the big issues.

The other is the Bankruptcy Abuse Protection and Consumer Protection Act, which took effect in 2005 and made it much harder for a retailer in bankruptcy to affirm leases and continue to operate, unless the reorganization plan with third-party reorganization financing and a deal with most significant landlords are already in place when the troubled retailer files for bankruptcy, by prohibiting lengthy extensions of time to affirm or reject leases.