Risk Management

Chapter 11 Watch: Forever 21 Dumped By Supplier, Brexit Shakes Things Up

Chapter 11 Watch

It was an odd week for retail bankruptcies, if only because news of the Brexit decision to pull out of the European Union seemed to give more cause for concern over retail's future on both sides of the Atlantic. But now that the British and their investors alike are filled with "Bregret" from the vote, it's time for retailers to pick through the financial debris in search of some silver lining to the political and economic fallout.

But if they're looking for that in the Chapter 11 Watch, they've come to the wrong place.

No major retailers went belly up over the past week, but it doesn't have to be the merchants themselves that go under for the boat that is the retail industry to be rocked on the waves of bankruptcy. As fast-fashion retailer Forever 21 is finding out, sometimes slowing sales on its end can lead to severe consequences way down its supply chain.

The Wall Street Journal is reporting that EZ Worldwide Express, a supplier for Forever 21, has canceled its contracts with the retailer as a result of its own bankruptcy proceedings. Citing the lack of sales generated by the Forever 21 brand (2015's weekly sales topped out at $780,000, while 2016's have maxed at $428,000), EZ announced its pullout after it failed to reach a financing agreement with Forever 21. This briefly threw inventory into doubt for the 171 Forever 21 stores for which EZ held an exclusive supplier contract, and it can't help the fast-fashion retailer's attempts to increase the sales that drove EZ away in the first place.

“Forever 21 looked at different financing options to assist EZ during its difficult financial time in order to continue the relationship, but were unable to come to an agreement,” the company said in a statement. “Accordingly, Forever 21 transitioned to other delivery providers and accepted the termination agreement with EZ, in order to continue to provide the exceptional experience our customers have come to expect from us.”

It'll never be as EZ as it was before, though.

Store Closures
The knee-jerk reaction to the Brexit leave vote was to immediately worry that every non-native U.K. brand would have to pull up its roots and relocate to cities back on the continent. This happened with at least one major brand, as U.K. social media blew up with concerned reports that beloved South African fast food chain Nando's was closing all of its British storefronts as a result of the leave vote.

Ironically, though, the first retailers to feel the effect of a Britain-less EU might be American instead.

The Street noted that shares of Michael Kors Holdings, PVH, Ralph Lauren and Tiffany are all down since the Brexit vote, and the brands' reliance on tourism-related sales is likely to keep them depressed for some time to come as foot traffic in tourist-heavy shopping centers around Europe will inevitably fall as a result. It's too soon to say whether American brands will have to reallocate resources in their overseas brick-and-mortar portfolios, but the writing on the wall doesn't spell out anything encouraging at the moment.

In fact, it looks like it's telling them to leave.

Most of the time, the kind of layoffs that make the Chapter 11 Watch are those that signal endemic problems to a retailer's operations — hundreds of in-store employees aren't laid off when things are going great. However, for all the thousands of employee terminations, the departure of one CEO might have more to say about where a retailer is heading overall.

That's what Macy's went through last week when it officially bid farewell to 13-year veteran CEO Terry Lundgren. Jeff Gennette, former president at Macy's, will assume Lundgren's role, though not his ongoing projects, as the department store's lagging foot traffic and increased competition for Amazon are necessitating a new approach that Macy's evidently did not believe the long-serving Lundgren could have handled successfully.

Macy's wasn't the only company to give its corporate employees a look at the axe last week. Chico's FAS, too, parted ways with 10 corporate employees as part of a rebranding effort.

"These changes mean hiring in some areas, and in other cases, some positions will no longer be needed," the company said in a statement. "Yesterday, less than 10 corporate positions were eliminated as part of these changes, and we will continue to work to ensure that our organizational structure is aligned with the needs of the business and market realities."

It just so happens that for retailers and their employees alike, those market realities usually end up on the harsher side of things.



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