Forever 21 Tries to Expand Youth Appeal With Acquisition

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Forever 21 Inc. is taking a $33 million bet.


Seeking to add to its already healthy growth, the Los Angeles-based retailer catering to teenage girls wanting the latest fashions at bargain basement prices has scooped up faltering rival Gadzooks Inc. and nearly doubled its store base.


Early indications are that the bet is paying off, with the once faltering Gadzooks outlets recording 40 percent 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 pay off in the long term a critical issue as the company finds both 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.


Forever 21 has leapt to the top of teenage girls’ shopping lists by offering private-label knock-offs of celebrity duds at discount-store prices of $10 to $30 for tops, pants, skirts and dresses. Boosted by sales at new stores, the company projects revenues 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 Carollton, Texas, added about 150 stores to Forever 21’s base of more than 200 stores dotting malls throughout the country. Forever 21 also is expected to open 20 smaller, accessory stores next year, and is planning to open up 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.



Brand integration


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 firm filed for bankruptcy last year when revenues 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, in order to leverage the Gadzooks’ brand. (It has filled the stores with Forever 21 merchandise.) Retaining the Gadzooks name will allow Forever 21 to locate its other store concepts 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,” he said. “As long as we continue to focus on that, we should win in the marketplace.”


Meanwhile the competition is converging. Foothill Ranch-based Wet Seal Inc. launched a turnaround effort last year and converted its stores to run on the Forever 21 model, a shift from a high price-point strategy attempted by a previous management team.


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 Stockholm, Sweden-based H & M Hennes & Mauritz AB, La Coruna, Spain-based Zara, the retail brand of Industria de Dise & #324;o Textil, and Mango, a chain under Barcelona-based Punto Fa, S.L. 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,” said Stern.


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.

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