Off-price clothing chain Factory 2-U Stores Inc on Wednesday reported a narrower second quarter loss amid soft sales in a tough retail environment, more markdowns and costs for a new distribution centre.

The California-based operator of 243 stores posted a net loss for the quarter ended August 2 of $5.4 million, or 35 cents a share, compared with a loss of $5.8m, or 45 cents a share, in the same period of 2002.

Sales slipped 3.5 per cent to $123.7m from $128.1m while same-store sales edged up 0.1 per cent.

CEO Bill Fields said: "Our second quarter results were below the low end of our expectations as a result of lower than expected sales in July, promotional efforts during the quarter and costs associated with the start-up of our new distribution centre in San Diego."

"We are optimistic about the 'Back to School' season and entered this period in an excellent inventory position. We expect comparable store sales for the third quarter to be in the range of positive three to four per cent, gross margins to improve and earnings of approximately one cent per diluted share."