Troubled discount-footwear retailer Footstar (OTC BB: FTSTQ.PK) continues to stumble even as it emerges from bankruptcy. It recently received a Well's notice that says the Securities and Exchange Commission intends to pursue civil action against the company. Another notice went out to the chief operating officer of Guess? (NYSE:GES), Carlos Alberini, who served as the financial chief at Footstar before the clothing company hired him away.
Footstar was at one time a leading shoe discounter. As it entered bankruptcy in 2004, it reported $2 billion in sales, 14,000 employees, and more than 600 Footaction and Just for Feet stores in 40 states and Puerto Rico. It sold its Thom McAn brand through Kmart -- which was itself a bankruptcy case and became part ofSears Holdings (NASDAQ:SHLD) -- and through Wal-Mart (NYSE:WMT). It also had more than 2,500 Meldisco licensed footwear departments that it operated through Kmart and now through Rite-Aid (NYSE:RAD) drugstores.
The shoe discounter's troubles began when it notified the SEC in 2002 that it had found discrepancies in its accounts-payable balances -- namely, a cumulative understatement of approximately $35 million in its athletics segment. The company was forced to announce that it would restate its financials from 1997 through 2002 -- a move that would reduce earnings by as much as $53 million over the five-and-a-half-year period covered by the restatements -- and would give its CEO the boot from the executive suite. Coupled with Kmart's bankruptcy, which created doubts about Footstar's ability to continue selling shoes to its largest distributor, Footstar's stock crumbled. The company ultimately filed for bankruptcy protection two years later and sold its Footaction stores to Foot Locker (NYSE:FL) for $160 million in cash.
Alberini came to Guess? as its new COO and president in November of 2000, just as the clothing retailer was in a tailspin of its own. Earnings have fallen 60%. Revenues had risen 39%, but that was solely on the strength of new store openings. Guess? was also on the verge of violating its $125 million credit agreement.
By all accounts, Alberini turned things around, so much so that last month Guess? reported a third-quarter jump in net income to $20.7 million, some 75% over last year, while revenues grew 34% to $265.6 million. Same-store sales rose 8% over the same period the year before.
A Well's notice is not a guarantee of action, though it's never a good sign, and the target of the notice has the opportunity to make a case that any enforcement should not proceed. Alberini has indicated that he will do just that. He just can't afford any more of Footstar's stumbles.
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Fool contributor Rich Duprey owns shares of Wal-Mart but of no other company mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
