By RACHEL BROWN
Forever 21 Inc.’s $33 million bet seems to be paying off,at least initially.
The Los Angeles-based retailer catering to teenage girls wanting the latest fashions at bargain prices scooped up faltering rival Gadzooks Inc. earlier this year. The deal nearly doubled the number of stores the chain operates.
The once-faltering Gadzooks outlets are recording 40% growth in same-store sales under the new management.
But while the company acquired a lot of new outlets on the cheap, it’s not clear whether the acquisition will work in the long term,a critical issue as the company finds domestic and foreign competitors catching up.
“From a real estate standpoint, it probably was a way for them to get sites quickly. Whether that brand has long-term sustainability, I don’t know,” said Neil Stern, a senior partner at Chicago retail consulting firm McMillan/Doolittle LLP.
One competitor that’s rebounding after a sharp fall is Foothill Ranch-based Wet Seal Inc.
The once-struggling teen retailer has closed more than 100 unprofitable stores this year and has converted its stores to run on Forever 21’s model of lower-priced clothing.
Wet Seal’s remaining locations posted a 59% jump in same-store sales in June. Total sales rose 29% to $49 million. The company’s bounce comes after two years of fashion misses and a corporate restructuring.
Forever 21 leapt to the top of teenage girls’ shopping lists by offering private-label knock-offs of celebrity duds at discount prices of $10 to $30 for tops, pants, skirts and dresses.
Billion-Dollar Sales
Boosted by sales at new stores, the company projects revenue could reach $1 billion this fiscal year, up from $640 million a year earlier. The privately held company does not release net income.
The $33 million acquisition of Gadzooks, based in the Dallas area, added about 150 stores. Forever 21 had about 200 stores under its name dotting malls across the country.
Forever 21 also is expected to open 20 smaller stores that sell accessories next year, and is planning to open a series of young men’s stores.
Forever 21 has excelled on several fronts, not the least of which is its success in stocking its stores with merchandise its customers want at prices they like. But there are other reasons.
Because the chain generally deals with local vendors, clothes can make it from the manufacturer to the racks in a month, quicker than the six- to nine-month lead times at department stores. Every week, there’s new inventory in Forever 21 stores.
Sharon Lee, co-president of research firm Look-Look Inc. in Hollywood, said the rapid merchandise turnover appeals to teens going to malls several times a week.
“They want something interesting every time they are coming in,” she said.
Now, the trick is to integrate a failing brand into its operations.
Gadzooks sold private label clothing but also carried Hot Kiss, Von Dutch and other hip brands, a mix that didn’t work.
The company filed for bankruptcy last year when revenue sank to nearly $260 million from $326 million the prior year.
“It was a concept that wasn’t resonating with consumers,” Stern said.
Forever 21 executives believe they can build on Gadzooks’ name recognition and have opted not to rename the stores. (It has filled the stores with Forever 21 merchandise.)
Retaining the Gadzooks name will allow Forever 21 to locate its other stores in the same malls as Gadzooks, according to Lawrence Meyer, chief financial officer.
“We feel that we have to continue to focus on the customer by giving them the latest fashion at the best value,” Meyer said. “As long as we continue to focus on that, we should win in the marketplace.”
Wet Seal Chief Executive Joel Waller said Forever 21 had set an example worth following.
“They have done a very, very good job of being quick to market and giving great value to their customer,” he said. “We would like to mimic that part.”
Another threat to Forever 21 could come from European retailers such as Sweden’s H & M Hennes & Mauritz AB, Spain’s Zara, the retail brand of Industria de Dise & #324;o Textil, and Mango, a chain under Barcelona-based Punto Fa SL.
Although relatively new in the U.S., these retailers are filling stores even more rapidly and turning runway trends into the latest must-have items.
“They are clearly the competition to watch,” Stern said.
But until stores of the European retailers multiply, Lee said Forever 21 can stay on top of the teenage retail pack if it keeps up with trends. “The second they do start blending into everybody else, then they will fall into the same trap as everybody else,” she said.
Brown is a staff writer with the Los Angeles Business Journal.
