FACTORY 2-U STORES INC. Anticipates Charges for Stock Options Based On Strong Performance.

SAN DIEGO--(BUSINESS WIRE)--Sept. 2, 1999--

FACTORY 2-U STORES INC. (NASDAQ:FTUS) Thursday announced that it anticipates taking a non-cash charge for a portion of its performance-based management stock options.

As previously disclosed, the company granted certain stock options under its Amended and Restated 1997 Stock Option Plan that vest over three years but become exercisable based on the market price of the company's common stock. These performance-based options, covering an aggregate of 351,444 shares of the company's common stock, become exercisable in four tranches if, in each case, the stock closes for 60 consecutive trading days above the following price targets: $19.91, $24.89, $33.19 and $49.78.

The non-cash compensation charges associated with such exercisability will depend on the actual closing price of the stock on the day the option would become exercisable, but will be at least $1.2 million for the $19.91 hurdle, $1.6 million for the $24.89 hurdle, $2.1 million for the $33.19 hurdle and $3.5 million for the $49.78 hurdle. Approximately 53% of the total performance-based options are held by a former executive of the company.

If the company's common stock closes above $19.91 on each of the remaining trading days through Oct. 1, 1999, the company will take a non-cash charge of at least $1.2 million for 92,960 performance-based options in its third quarter ending Oct. 1999. The actual amount of the charge will depend on the closing market price of the stock on Oct. 1, 1999, and will equal the difference between the closing price on Oct. 1, 1999 and $7.47 (the exercise price of the options) multiplied by 92,960 (the number of options which would become exercisable on Oct. 1, 1999).

A second tranche, covering 92,961 options with a hurdle price of $24.89, would become exercisable on Nov. 4, 1999 if the stock closes above $24.89 on each of the remaining trading days up to and through Nov. 4, 1999. If the second tranche of 92,961 options become exercisable, the company would take a charge of at least $1.6 million in its fourth quarter ending Jan. 2000. On Aug. 31, 1999 the company's common stock closed at $28.56.

Mike Searles, chairman and chief executive officer, commented, "We have based our option plans on the theory that employee and shareholder interests should be aligned. We are pleased that our employees' efforts over the past few years have been recognized by the stock market, and that they are able to participate with our stockholders in the value that is being created."

FACTORY 2-U STORES INC. operates 179 "Factory 2-U" and "Family Bargain Center" off-price retail stores which sell branded casual apparel for the family as well as select domestics and household merchandise at prices which generally are significantly lower than the prices offered by its discount store competitors. Stores are located in seven states in the western United States.

Except for the historical information contained herein, the matters discussed in this news release are forward-looking statements that involve risk and uncertainties, and actual results could differ materially from the company's present expectations. Among the important factors that could cause actual results to differ materially from those indicated in the forward-looking statements are: customer demand and trends in the off-price apparel industry, the effect of economic conditions, the impact of competitive openings and pricing, supply constraints or difficulties, and other risks detailed in the company's Securities and Exchange Commission filings.