By Matt Jarzemsky, Dana Mattioli and Suzanne Kapner 

Fast-growing teen retailer Forever 21 Inc. is sounding out landlords about downsizing some of its biggest stores, according to people familiar with the matter.

The company is also in talks with Wells Fargo & Co. and TPG to obtain a $150 million loan to bolster its balance sheet, some of these people said. The financing is a rare instance of the closely held company turning to outside investors, the people continued.

Forever 21, which discloses little about its finances, has predicted that sales would rise 10% this year to $4.7 billion. But people familiar with the company say its sales and profit have tapered off after years of strong growth. The company has stumbled by expanding into cavernous stores that it had trouble filling productively, they said.

Brian Tunick, an analyst with RBC Capital Markets, estimates that excluding newly opened or closed stores Forever 21's sales have been running negative for the past 12 months.

"After several years of fantastic results," Mr. Tunick said, "they are facing some of the same struggles that other teen retailers are facing."

Those challenges include pricing pressures as frugal shoppers seek out ever-better deals and the changing tastes of fickle teens, who increasingly prefer to create individual looks rather than buying from big chains. Abercrombie & Fitch Co., American Eagle Outfitters Inc. and Aeropostale Inc. have reported slumping sales, while other chains, including Wet Seal Inc. and Delia's Inc., have filed for bankruptcy protection.

Forever 21's low priced fashions, including $8 tops and $10 sweaters, ushered in a deflationary cycle that has left apparel retailers reeling. Prices for women's clothes have fallen 13% since 2000, according to figures that Mr. Tunick compiled from Euromonitor and RBC. In women's tops, where Forever 21 is strongest, prices have declined 23% over that period.

Those pricing pressures are unlikely to let up. Forever 21 has begun a new chain called 21Red that appeals to a wider swath of customers and offers prices below the flagship brand.

Forever 21 has expanded into new categories, including plus sizes, accessories and intimate apparel, and it is making a push to appeal to older shoppers. But it has had trouble getting the sales it needs to make its large stores productive. The company has opened stores in recent years--including a 90,000-square-foot store in New York's Times Square, a 94,000-square-foot store in San Bernardino, Calif., and a 127,000-square-foot store in Las Vegas--that are double and triple the size of previous locations.

The retailer is in talks with landlords about downsizing some of its bigger spaces. The company is in discussions with Simon Property Group about reducing the 100,000-square-foot space it occupies in the Tacoma Mall in Tacoma, Wash., that it took over from Nordstrom in 2010, according to people familiar with the situation. These people said that Forever 21 will continue to have a presence at the mall, but a smaller one.

"Forever 21 was less disciplined than some of their competitors in terms of the size of the box they occupied," said Gary Lewis, a real-estate consultant. "Now they are approaching landlords about taking some of that space back."

The retailer, which has 720 stores and plans to open 100 more this year, has also struggled with large stores in Europe. The new loan is expected to help fund expansion in South America, according to people familiar with the situation, but could also be used to buyout leases at struggling European stores.

Up until now, the company has taken on hardly any debt to fund its expansion, using cash flow from operations and a credit line from Wells Fargo, the people said.

Forever 21 traces its roots to a 900-square-foot store on Figueroa Street in Los Angeles, opened in 1984 by Korean immigrant Don Chang and his wife, Jin Sook. Mr. Chang and his wife keep a tight control on the company, which is why they arranged the loan quietly, rather than engaging in a broad marketing process that would have involved disclosing financial information to a wide range of hedge funds and private equity firms. Mr. Chang said in July that business continues to be strong.

Mr. Tunick, the RBC analyst, estimates that Forever 21 commands a 10% share of the U.S. apparel market, up from 3% in 2003. By his assessment, Forever 21 has grown its U.S. market share faster over that period than any other retailer, including Hennes & Mauritz's H&M chain.

Write to Suzanne Kapner at Suzanne.Kapner@wsj.com, Matt Jarzemsky at matthew.jarzemsky@wsj.com and Dana Mattioli at dana.mattioli@wsj.com

 

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(END) Dow Jones Newswires

August 31, 2015 21:16 ET (01:16 GMT)

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