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Gottschalks Looks to Avoid Bankruptcy

Talks ongoing with Everbright and second potential investor.

Gottschalks is seeking investment capital to help it stay afloat.

Talks with two potential invest-ors may hold the key to whether Gottschalks Inc. can avoid a bankruptcy filing.

This story first appeared in the January 9, 2009 issue of WWD.  Subscribe Today.

The 58-unit retailer, based in Fresno, Calif., has been in discussions with Everbright Development Overseas Ltd. and another party seeking investment capital to help it stay afloat. Credit sources said the other party is El Corte Inglés, Spain’s largest department store retailer, which owns about a 16 percent stake in the California chain through U.S. unit Harris Co.

In November, Gottschalks reached a definitive agreement with Everbright, a British Virgin Islands firm that is based in China, for an investment of up to $30 million, or a 75 percent stake in the retailer, but that deal expired Dec. 15 without being finalized. Had it been completed, Everbright was expected to help Gottschalks boost its private label penetration, which is less than 10 percent. The deal also would have opened the door for other options, such as consignment arrangements that would add additional product categories.

Since Dec. 15, discussions regarding the structure of a different investment have been ongoing. Sources said the current negotiations have centered on Everbright and El Corte each contributing $25 million for a total $50 million capital infusion into the troubled chain. The parties are expected to vote on the proposed investment sometime soon, possibly as early as today, sources said. Executives at the company could not be reached for comment.

Gottschalks said on Dec. 19 that it remained in discussions with Everbright following the expiration of the initial period of due diligence. It also said it was in talks with “another party” but didn’t disclose its name.

Harris Co. agreed in July to extend the repayment due date for a line of credit until May 2010 from May 2009.

But sources indicated that any investment might be too late, serving just to buy it a little more time, but not much else.

Gottschalks, one of a series of hard-pressed regional department stores, has units in six Western states and has been hit hard by the weakening economy. The company does about 80 percent of its business in California, an especially difficult market. That area has already seen the bankruptcy and liquidation of Mervyns, also hard hit by the troubled local economy.

The current credit crisis has made it difficult for many firms to obtain financing, and the negotiations with Everbright and El Corte may be Gottschalks’ last chance to survive another day.

Sources said Gottschalks stopped paying its vendors around mid-December to conserve its cash position, and has been trying to cut deals with vendors to get goods shipped to its stores.

Credit sources said Gottschalks’ problem isn’t its business model, which in the long run is still viable, even though its average box is 90,000 square feet, with some as small as 40,000 square feet and others as large as 160,000 square feet. The company’s problem is lack of liquidity, and there are fears that if the retailer doesn’t get a capital investment, it might run out of cash for daily operations at the end of the month.

Gottschalks has been struggling on and off for years.

In December 2006, the retailer hired UBS to help explore options such as selling the entire company or just to seek buyers for some of its real estate. Sources believe the retailer still owns five sites in California, in Antioch, Eureka, Hanford, San Luis Obispo and Yuba City. At one point in May 2007, even Wal-Mart Stores Inc. contemplated buying some of Gottschalks’ locations, both in Northern and Southern California. The retailer also has a 36 percent stake in its headquarters in Fresno, and owns the 76 acres of land on which its distribution center operates.

For the nine months ended Nov. 1, the regional retailer posted a loss of $19.7 million, or $1.48 a share, compared with a loss of $13.6 million, or 99 cents a share, last year. Revenues in the three quarters fell 10.3 percent to $385.1 million from $429.3 million.

Gottschalks was delisted by the New York Stock Exchange in October and is now traded on the Pink Sheets. Shares rose 7.5 percent in trading Thursday to close at nearly 22 cents.