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San Diego Discount Apparel Retailer Files for Chapter 11; Stores Stay Open
The San Diego Union-Tribune
Frank Green
January 14, 2004
The San Diego company, which operates 243 stores, most of them in California, said it had obtained a commitment of $45 million in financing from CIT Group-Business Credit and GB Retail Funding to help carry it through the court process and keep its outlets open and stocked.
However, analysts yesterday questioned the long-term validity of the chain's marketing concept in trying to battle such discounters as Wal-Mart, Target, Ross and a legion of dollar-only stores in pursuit of low-income and working-class customers.
Factory 2-U, which primarily targets families with annual incomes of about $30,000, saw sales fall more than 10 percent during the crucial five-week holiday period that ended Jan. 3. Same-store sales dropped by 5.8 percent.
The sour numbers came as many chains last week reported solid December results.
"Their stores are just too small, (and) they have a slew of larger competitors," said George Whalin, president of Retail Management Consultants in San Marcos.
Whalin expects the company to close some far-flung stores in isolated markets outside of California.
"What are they doing with only one store in Oklahoma, one store in Idaho?"
Whalin asked. "It has to be very difficult to keep those stores stocked with merchandise."
Shares of Factory 2-U closed yesterday at 54 cents, down 61 cents, after news of the Chapter 11 filing. Just three years ago, Factory 2-U stock was trading in the $40-plus range.
Analysts had been predicting Factory 2-U's bankruptcy filing since William Fields abruptly resigned last month as chairman and chief executive officer.
Fields, a former executive at Blockbuster Entertainment and Wal-Mart Stores, joined the firm with much fanfare in November 2002.
Analysts said Fields had nixed an effort by the previous management to appeal to higher-income shoppers, but his plan to refocus Factory 2-U on low-income consumers failed to boost sales.
Yesterday, Factory 2-U appointed Norman Plotkin, a veteran Factory 2-U executive, as chief executive officer. He had been interim CEO during the last month.
John Swygert was appointed the chief financial officer.
Calls to Plotkin were not immediately returned.
In a statement, Plotkin said Factory 2-U has established a long-term marketing plan based on productive stores in good locations and solid management.
The company has demonstrated in the past that it "can perform extremely well by providing our traditional customer base with branded apparel and other basic items at a great value," Plotkin said. "Our team believes strongly that with the right merchandising mix and marketing plans, this strategy will be successful."
Factory 2-U said yesterday that it will use Chapter 11 protection to restructure $73.5 million in debt.
The company had $136.5 million in total assets as of Jan. 3, according to its bankruptcy filing in the U.S. Bankruptcy Court for the District of Delaware.
"I feel sorry for anybody trying to compete by having prices lower than Wal-Mart and Target," said William Rochelle, bankruptcy partner at law firm Fulbright & Jaworski. "This is the continuing life history of discounters."
Factory 2-U's largest unsecured creditors include Landmark Secondary Partners, with $5.4 million in subordinate notes; American Endeavour Funds, with $5.3 million in subordinate notes, and Valassis Communications, with $2.2 million in trade debt.
The company, which has hired turnaround specialist Crossroads as its restructuring and financial adviser, has filed motions with the bankruptcy court to pay employees, honor gift cards and layaway and continue its refund policy.
Factory 2-U was founded as Family Bargain in New York in the late-1970s by Norman Weinstein, who sold the company in 1989 to Kenmar Capital in a leveraged buyout.
Three years later, the firm was purchased out of bankruptcy by a company owned by Benson and John Selzer and Joseph Eiger, who would become the firm's chairman, president and vice chairman, respectively.
At the time, Family Bargain was operating about 80 stores and posting annual revenue of about $140 million.
Seven years ago, the firm, which had expanded to 150 stores and increased revenues to $250 million, announced that investment funds led by ThreeCities Research would pump $30 million into the business to acquire a controlling interest.
About $10 million of the fresh capital was used to buy out the Selzers and Eiger.
Family Bargain later spent a reported $1.5 million to find a chief executive officer, Mike Searles.
Searles closed about 25 stores in low-rent locales, changed the names of all the chain's stores to Factory 2-U and refashioned the product mix to include designer labels such as Nike, Levi's and Adidas.
But Searles stepped down in 2002 in the wake of sluggish sales at the chain and was replaced by Fields.
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