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What Forever 21 Will Do With Mervyns

Forever 21 has submitted a stalking-horse bid to buy most of the 176 remaining Mervyns stores, intending to expand from its 430 mall stores into stand-alone locations in California and other Western states.

The Los Angeles fast-fashion chain first tried to buy Mervyns in 2004, when Target Corp. sold it to an investment group for $1.2 billion, according to Apparel News. "Our vision has always been to get a bigger box," senior vice president Christopher Lee said. "We've been looking at these assets for many years." Forever 21, which is privately held, says its sales will exceed $1.8 billion in 2008, up from $1.3 billion last year. It's opening its first store in South Korea this month, adding a store in Thailand and is scouting locations for a flagship store in Shanghai.

Here's the thing. Trades have been positioning this as a real estate play â€" while Mervyns unloads its stores at bankruptcy-sale prices, Forever 21 gets to pick up a lot of big store locations. It can convert the best and sell the rest.

"Real estate is low right now," Jeffrey Van Sinderen, a retail analyst at B. Riley & Co., told Apparel News. "If you can get it at the right price, it is probably not a bad move at this juncture. It diversifies their footprint."

Most of Forever 21's stores are 10- to 20,000-square-foot mall locations. But one of Forever 21's biggest existing stores is a 40,000-square-foot former Saks Fifth Avenue in Pasadena, Calif., while it's subdividing a former Lord & Taylor at FlatIron Crossing in Broomfield, Colo., taking the 55,000-square-foot upper level and sharing the rest of the space with a new Container Store.
"Forever 21's goal has been to open more big-box concepts to keep its annual sales volume growing at a healthy clip," Apparel News' Deborah Begum writes

Quick quiz. What other fast-fashion retailer grew fast â€" too fast, as it turns out â€" by making sweetheart deals with nervous landlords of big-box centers and shopping malls? Answer: Steve & Barry's â€" and we know how that turned out.

Ironically, after filing Chapter 11 in July, Mervyns sued Target and its former investment-group owners, including Sun Capital Partners, Cerberus Capital Management, and Lubert-Adler/Klaff & Partners. Says Apparel News: "The lawsuit claims that to finance their leveraged buyout, the investment groups borrowed hundreds of millions of dollars against Mervyns' real estate while separating the store locations from Mervyns' retail operations. Court documents said that the new owners then turned around and increased rents to service debt and took advantage of rising property values."

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