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Searles Resigns at Factory 2-U

NEW YORK — Outgoing chief executive officer of Factory 2-U Stores Michael Searles is not leaving the offprice chain so fast. He told WWD Thursday he’s staying on until a successor is found, which could take four months. <br><br>Just the...

NEW YORK — Outgoing chief executive officer of Factory 2-U Stores Michael Searles is not leaving the offprice chain so fast. He told WWD Thursday he’s staying on until a successor is found, which could take four months.

Just the day before, the hurting off-price retailer, based in San Diego, announced Searles’ resignation and reported dismal second-quarter results. Coincidentally, there were rumors the same day that he was headed to Kmart, but Searles said the rumors were false and that it’s in his best interests to stay on at Factory 2-U until his successor is in place.

“I’m a large investor,” with 400,000 shares, he said. He noted that during his five-year tenure, the stock price swung from $1.75 to $44. In Nasdaq trading Thursday, shares sank to and closed at a new 52-week low of $2.89, losing 75 cents or 20.6 percent. It was the second yearly low point for the stock in as many days. Searles, who also holds the title of president, said he’s close to selecting a search firm to find his successor.

Kmart is searching for a new chief merchant, and reportedly once considered Roger Goddu, who ran the now-defunct Montgomery Ward chain, and Cindy Sapienza, a former top women’s merchant at Kmart.

For the three months ended Aug. 3, the company lost $5.8 million, or 45 cents a share, compared with a loss of $195,000, or 2 cents, in the same year-ago quarter. Excluding a $2.1 million charge, or 10 cents, for the settlement of a lawsuit that is still subject to court approval, the loss would have been $4.6 million, or 35 cents a share. The lawsuit alleged the chain violated the California Labor Code and Internal Wage commission Orders by classifying store managers and assistant managers as exempt salaried employees, thereby failing to pay them overtime.

Sales in the period dropped 8 percent to $128.1 million from $139.3 million, while comparable-store sales fell 8.7 percent against a decrease of 2.4 percent a year ago.

For the six months, the loss was $9 million, or 69 cents a share, versus a loss of $1.6 million, or 13 cents, a year ago. Sales slipped 7.6 percent to $245 million, while comps dropped 10.2 percent. The year-ago comp decline was 4.2 percent.

Searles said that the loss reflects the heavy investment made to stimulate traffic. The company in July held a grand reopening effort, and said this month that it has “reversed” their negative transaction count trend in July.

Richard Jaffe, specialty retail analyst at UBS Warburg, wrote in a research note that the company is “enormously challenged. Uncertainty regarding merchandising, marketing, management and no visibility for growth lead us to remain on the sidelines on shares” of the company. He reiterated his “hold” rating on the firm.

Jaffe also noted that Factory 2-U is “one of the few off-price retailers that has not benefited from today’s value-driven consumer. Continued economic uncertainty, merchandising missteps, ineffective marketing and increased competition from major discounters, particularly in the apparel category, will likely continue to depress [Factory’s] results through 2002.”