After yet another stock implosion at 99 Cents Only Stores Inc. last week, analysts and shareholders were placing the blame on company founder and Chairman David Gold, saying he has steadfastly refused to hire enough professional managers to steer the fast-growing company through a period of major change.

Several large Los Angeles-based money managers were livid last week that the company had refused to provide an explanation for the resignation of James Ritter, a former chief financial officer at Bristol Farms who had joined 99 Cents Only Stores in December.

Ritter was expected to get the company's internal financial controls in compliance with 2002 Sarbanes-Oxley regulations. His resignation came a day after the discount retailer announced it would miss the deadline to meet the requirements of Section 404 of the act certification of internal financial controls.

Analysts speculate that the problems were too big for Ritter to risk signing his name on certification documents that must be filed with the Securities and Exchange Commission.

The company also said it would delay filing its upcoming 10-K report and would have to restate past earnings because it failed to account for the cost of some leases and depreciation issues.

"It's disappointing but not surprising," said Joan Storms, an analyst at Wedbush Morgan Securities, who said executives now face penalties and the threat of jail for failing to comply with Sarbanes-Oxley. "These days, we don't really know what happens if you're not in compliance."

99 Cents Only also announced last week that the New York Stock Exchange had determined that one of its directors, Ben Schwartz, was not independent. Schwartz's son, an independent broker to discount retailers, was paid $576,000 in commissions and fees by 99 Cents Only Stores in 2003, $439,000 in 2002 and $368,000 in 2001, according to the company's latest proxy.

That resignation created an imbalance on the board, forcing Howard Gold, the founder's eldest son, to temporarily step down until a new independent director can be found.

Continuing troubles

The cascade of events marked the second blow-up in the past year for 99 Cents Only, which missed earnings forecasts in June because of inventory problems at a Los Angeles warehouse. The company's stock has cratered to $13.24 a share last week, after peaking above $36 in September 2003.

Several Los Angeles-based money managers, including Kayne Anderson Rudnick Investment Management LLC, which owns 8 percent of outstanding shares, and PrimeCap Management Co., the Pasadena-based mutual fund manager, have taken a bath on the stock. FMR Corp., parent of Fidelity Investments, dumped most of its shares last year, but after the stock had tanked in June.

Anthony Chukumba, an analyst at Morningstar Inc. and a former Merrill Lynch & Co. investment banker, worked on a secondary offering for 99 Cents Only Stores several years ago. He said the core problem is that David Gold runs 99 Cents Only Stores like "a private business with a ticker symbol."

"What makes 99 Cents Only Stores so great is that these guys are incredible negotiators they're always looking for a bargain, they want to buy a dollar for 50 cents," Chukumba said. "But that's also a problem, because they're always looking for a great deal."

Several analysts said David Gold is so frugal he refuses to pay salaries appropriate for the company's size. Gold, who relinquished the title of chief executive last year but remains chairman, earned $158,000 in 2003, while his son-in-law, Eric Schiffer, who took over as chief executive, earned $117,000.

In announcing a new management team in January, Schiffer admitted that the company has struggled to address issues of execution.

"We believe that it could take most of 2005 to resolve the majority of these executional issues," he said.

Last week, company officials did not return calls.

Frugality may have created the 99 Cents Only concept, but it also has led to mishaps. One reason the company expanded into Texas, for example, was the opportunity to buy a state-of-the-art warehouse facility for pennies on the dollar, Chukumba said.

"They never asked themselves whether Texas was a place that made sense for them to expand into especially given the competition there from Wal-Mart Stores Inc., Dollar Tree, Family Dollar and Dollar General," he said. "They would have been much better-served to just build stores in California, Phoenix and Las Vegas."

The move into Texas has been a disappointment. Annual sales in California average $4.8 million per store and $293 per square foot, while in Texas the average is $2.2 million per store and $101 per square foot.

For the fourth quarter, 99 Cents Only Stores reported a 3.8 percent drop in same-store sales, the best measure of retail performance. Total sales of $265.7 million, up 7.4 percent from the year-ago period, were below analysts' projections. In 2004, sales-store sales fell 1.5 percent but total sales rose 12.7 percent, to $971.9 million.

While critical of management, analysts say there is no danger of a financial crisis because of rich real estate assets and virtually no debt. Even short sellers, who went after the company aggressively over the past year or two, have begun covering their positions, reasoning that at this point the stock has a good chance of rebounding.

Next steps

One possibility is a sale of the company, but that won't happen without the acquiescence of Gold. (Through various entities, Gold family members own between 32 percent and 35 percent of the stock, according to its 2004 proxy statement.)

With Ritter's departure, the company has taken the rare step of hiring SpencerStuart, an outside executive search firm, to find a new chief financial officer. But there are major management challenges ahead.

"They're encountering very severe growing pains," said Jim Ragan, an analyst at Crowell Weedon & Co. in Los Angeles. He said the infrastructure is insufficient to handle its growth over the past several years, while management "took their eyes off the ball."

"The timing of this was very poor," he said. "We knew they had weak financial controls and they looked like they were addressing those. Now the company needs an experienced CFO."

Analysts also have criticized the elevation of David Gold's eldest son, Jeff Gold, to president and chief operating officer in January, with responsibility for store operations.

"There's been a vacuum of information and lapses in judgment by the company," said Storms. "The mindset of this family historically has been not to spend money and to be very lean on the administrative staff. They may be well-meaning and sincere, but there's going to have to be a lot of investing to fix the business."

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