Updated from June 11

A yearlong slide in

99 Cents Only Stores


continued after the company wheeled out a pallet of bad news including lower earnings guidance, a re-evaluation of its inventory procedures and the hospitalization of its chief executive.

The discount chain forecast second-quarter earnings of 4 cents to 7 cents a share on an unexpected 3% or 4% drop in same-store sales. Analysts surveyed by Thomson First Call had been predicting earnings of 19 cents a share on sales of $243.8 million for the quarter.

The company's stock, which traded around $35 a year ago, was recently down $5.38, or 26.3%, to $15.10. It closed Thursday at $20.48.

The company's biggest problem appears to be an overtaxed warehouse in Los Angeles that is causing late deliveries and products to go out of stock at its retail outlets. The company also cited aggressive markdowns by competitors following the resolution of the Southern California grocery workers strike and higher-than-expected sales of low-margin products like food.

"Our Los Angeles distribution center is operating at over-capacity, which negatively impacted labor productivity, store deliveries, store level in-stock positions and consequently, comp sales," the company said. "We expect to expand our warehouse capacity by the fourth quarter."

Breaking out the various impacts, 99 Cents Only said lower same-store sales, the higher percentage of low-margin sales and higher dairy prices will cut 3 cents a share out of second-quarter earnings. Higher lost merchandise and markdown provisions will cut another 5 cents to 8 cents a share, while higher fuel, litigation and worker compensation expenses will cut 3 cents a share.

The company said it will hire an outside consultant to assist in evaluating inventory controls and procedures at stores and various warehouse locations.

"We believe we can resolve our distribution difficulties, as well as address the challenging economic events affecting the company's sales and margins in the current quarter," it said in a statement. "Corrective actions have begun to be put into place to address volatile dairy pricing, improve reliability of store deliveries and to obtain additional warehouse overflow space. We also believe the new California workers' comp laws will have a positive effect on costs by 2005."

Topping it all off, the company revealed that CEO and founder Dave Gold is "presently hospitalized after heart bypass surgery earlier this week."

"We all wish him well," the company added.