Forever 21 filing for bankruptcy not once, but twice, is a prime example of what happens to businesses that don’t (1) evolve and (2) manage operating costs in industries like retail, that habitually struggle with thin margins.
The brand couldn’t keep up with competition from recently emerged foreign fashion powerhouses like Shein and Temu. These brands quickly became consumer favorites with what seems like limitless coupons, free international shipping, and aggressive marketing across social media.
Their low-cost, high-volume approach made it easy for consumers to grab a haul of trendy outfits for a fraction of the price. On Shein, for example, a dress can cost as little as $6. Even if someone bought 100 of them, these brands have historically skirted the de minimis exemption, which allows shipments under $800 to enter the U.S. duty-free. With the ongoing discussion around tariffs, that loophole may be closing soon.
But beyond pricing, Forever 21’s biggest misstep was failing to evolve its merchandise. While Shein and Temu flooded the market with fresh styles at lightning speed, Forever 21 was still selling variations of the same outfits season after season. Consumers who once flocked to the brand moved on, seeking faster trend cycles and better value.
Another major issue? Real estate costs. Shein and Temu operate almost entirely online, avoiding the high rent and CAM (common area maintenance) charges that come with operating oversized stores in malls – malls that, for many shoppers, are an afterthought. Without a strong e-commerce pivot, Forever 21 was carrying an outdated retail model in a world where convenience and fast fashion now live online.
At this stage, Forever 21 will wind down its U.S. operations through liquidation sales. The only way it won’t shut its doors forever (no pun intended) is if new investors step in to save it. Employees will still be paid, and necessary operating expenses will continue, but the future of the brand depends entirely on whether a buyer sees enough value to keep it running.
The Accounting Side: Going Concern vs. Liquidation
From an accounting perspective, whether Forever 21 is acquired or liquidates changes everything about how its financials are reported.
Option 1: Going Concern: Business as Usual (Under New Ownership)
If a buyer steps in and acquires the company, it will be treated as a going concern transaction. Forever 21’s financial statements won’t change much as far as asset valuations and such. A going concern means the business is expected to continue operating for at least the next 12 months. Under this assumption, assets like inventory, property, and equipment stay on the books at historical cost (what the company originally paid for them), rather than being adjusted for an immediate sale.
Financial statements must also disclose if there was substantial doubt about the company’s ability to continue, along with how that uncertainty was resolved. Here’s an example of what that footnote might look like:
Management has evaluated the Company’s ability to continue as a going concern and determined that recent financing and restructuring efforts will provide sufficient liquidity to sustain operations for the foreseeable future. As a result, the financial statements continue to be prepared on a going concern basis.
Option 2: Liquidation Accounting (Selling Off the Business)
If no buyer steps in, Forever 21 must switch to liquidation accounting. This means all assets are written down to net realizable value – essentially, what they would sell for in an auction or fire sale.
Here’s a breakdown of the accounting treatment for this scenario.
Example: Writing Down Assets in Liquidation Accounting, assuming the below:
Equipment originally cost $100,000
Accumulated depreciation is $40,000
Estimated liquidation value is $50,000
Journal Entry to Adjust to Liquidation Value:
DR Accumulated Depreciation $40,000
DR Loss on Write-Down $10,000 (plug)
CR Equipment $50,000
This entry removes historical depreciation and records the loss from writing the asset down to its estimated sale value.
Journal Entry for Sale of Equipment in Liquidation:
DR Cash $50,000
CR Equipment $50,000
Once the equipment is sold, cash is received and the asset is removed from the books.
Under going concern, none of this happens – assets remain at cost, and depreciation continues as usual.
Final Thoughts: When Businesses Don’t Evolve, the Numbers Catch Up
Forever 21’s downfall is driven by the company missing the shift in consumer behavior. The brand stayed too reliant on mall traffic, failed to keep its merchandise fresh, and ignored the rise of fast, ultra-affordable e-commerce competitors. The result is an anantiquated business model that couldn’t keep up.
But as we’ve seen with companies like Bed Bath & Beyond, which sold its intellectual property (IP) to Overstock, a brand doesn’t always disappear completely.
Personally, I was sad to see Bed Bath & Beyond go. A lot of people left the store for competitors, but that was still my go-to spot for some of the best home decor. Had the credit card and loyalty rewards and everything. The liquidation sales were a painful reminder of what happens when a business loses relevance – and when the numbers finally catch up.
For accountants, finance professionals, and business leaders, the lesson here is clear: the financials tell the story – but business strategy determines the ending.
How do you see brands navigating these shifts? Have you ever seen a company you loved struggle because it refused to adapt? Let’s talk about it in the comments.
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