By and  on April 5, 2005

NEW YORK — Regional department store chain Gottschalks Inc. is on the selling block and has hired investment banking firm Financo Inc. to explore strategic alternatives, people familiar with the retailer said.

“I know that the company has been for sale.…That’s a no-brainer for them,” said a hedge fund manager who has met with Gottschalks’ management. The chain is “not competitive on a stand-alone basis” and could be acquired for its increasingly valuable real estate portfolio, said the hedge fund manager, who spoke on condition of anonymity.

Earnings at Gottschalks, which is based in Fresno, Calif., and has 64 full-line stores with gross square feet per store of 25,000 to 208,000, have improved because of a focus on expense and inventory management. In its latest fiscal year, profits spiked to $5.8 million compared with $1.9 million in 2003. The company has a market capitalization of $136.4 million.

The retailer’s chief executive officer, James Famalette, said in response to a question about Financo: “We really don’t discuss items such as that. That would be private information....We’re not saying it’s true or false.”

Gottschalks hired Financo at least a month ago, said people familiar with the retailer. Financo officials declined to comment. But Gottschalks has been a Financo client since 2002 “for general advisory financial services,” according to the investment banking firm’s Web site. Financo helped Gottschalks sell its private label credit card business in 2003, which freed up $30 million in capital. Financo also advised the retailer on closing unprofitable stores and cutting costs.

The chain might command at least $15 a share for its common stock if it were to be sold, said John Pinto, managing partner at Brightleaf Partners, an investment partnership. Other estimates have gone as high as $18 a share, which would put the worth of the company at $194 million to $233 million.

The estimated per-share prices represent a premium of 30 percent to 41 percent over the stock’s close of $10.54 Monday in New York Stock Exchange trading.

Several retailers are seen as good fits to acquire Gottschalks, including J.C. Penney Co., Dillard’s Inc., Goody’s Family Clothing, and a majority stakeholder in Gottschalks, El Corte Ingles SA, a Madrid-based department store operator.“I can’t say I’m really surprised,” said Ben Strom, an analyst at Variant Research Group, referring to Gottschalks’ agreement with Financo. “They do have to rationalize to their shareholders how they can continue to operate as a stand-alone company against these large, sophisticated competitors with more financial resources and economies of scale.”

Gottschalks’ management is “not oblivious to the fact that there’s real estate value well over the market of what they’re paying for it,” Strom said.

Indeed, Gottschalks’ real estate has long been stressed by those familiar with the company as one of its major assets and one reason its shares could command a premium. However, the diverse sizes in the store locations have been cited by some analysts as a deterrent to getting the chain sold.

Brightleaf’s Pinto, however, said the company’s assorted store sizes “really requires somebody that’s willing to go in there and piece apart some of its stores, to sell the lease to whomever will take some of it and continue with the core business and/or fold it into someone else’s brands”

For those reasons, Pinto said Penney’s, with $4.7 billion of cash on its balance sheet, may be a good fit for Gottschalks. Penney’s could continue to run Gottschalks as a business, but turn some of its better off-mall locations into Penney’s stores in order to compete with Kohl’s Corp., which has a significant presence in California. Penney’s might also selectively sell off some of Gottschalks’ store locations for the value of the real estate.

However, that’s one reason real estate investment trust Vornado Realty Trust might be interested in the chain, which has more than half of its stores located in the tight California real estate market.

Dillard’s could also want more western exposure, Pinto said. Strom agreed, noting Dillard’s West Coast division is its smallest unit. Dillard’s has $498.2 million in cash on its balance sheet, but many analysts said the department store chain has its hands full turning its business around and staying competitive.

El Corte Ingles, which has a 16.7 percent stake in Gottschalks, might be preparing to increase its stake in Gottschalks since shareholding restrictions against the privately held company were amended in December. El Corte, which operates 80 department stores and 30 hypermarkets in Spain and Portugal, could be looking to make a U.S. presence.

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