Factory 2-U Files for Bankruptcy Protection

Cut-price retailer Factory 2-U Stores Inc. filed for bankruptcy protection Tuesday after struggling through a weak holiday shopping season and harsh competition from bigger rivals such as Wal-Mart Stores Inc.

The move, which triggered a sell-off in its stock, came just days after Factory 2-U reported a sharp drop in December sales. Amid turmoil about its direction, the firm also has replaced top management in recent weeks.

The San Diego-based company, operator of more than 240 stores in the Western and Southwestern United States, will use Chapter 11 protection to restructure some $73.5 million in debt. It plans to continue operating through the process.

“This was by no means a surprise,” said Northeast Securities analyst Eric Beder, who dropped coverage on the stock Tuesday. “Management had been in chaos for about a month, as you had the CEO and the CFO resign.”

William Fields resigned as chief executive Dec. 10 after slightly more than a year.

The previous management had tried to make the chain more appealing to higher-income shoppers. Beder said Fields halted that effort, but his plan to refocus on low-income consumers failed to boost sales.

The company’s chief financial officer, Douglas Felderman, was replaced last week.

For the five weeks ended Jan. 4, the company, which sells discounted casual apparel and other items, posted a 5.8% decline in sales at stores open at least a year Most retailers were reporting sales increases during the key holiday season.

Factory 2-U also was finding it difficult to compete against larger rivals, particularly Wal-Mart, Target Corp. and Kmart Corp., which itself recently emerged from bankruptcy protection.

“Wal-Mart and Kmart have become aggressive in clothing by bringing in more fashion at lower prices, and that hurt them too,” Beder said.

The company has received a commitment for a $45-million debtor-in-possession financing from CIT Group Inc.’s CIT Group/Business Credit Inc. and GB Retail Funding, its senior lenders, Factory 2-U said.

In addition to the $73.5 million in debt, Factory 2-U had $136.5 million in total assets as of Jan. 3, according to the company’s 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 Ltd., with $5.3 million in subordinate notes, and Valassis Communications Inc., with $2.2 million in trade debt.

Factory 2-U shares fell 53% Tuesday, losing 61 cents to close at 54 cents on Nasdaq.