By  on May 7, 2007

Wal-Mart Stores Inc. may have found a way finally to enter the Northern California market: buy the Gottschalks chain of department stores.

Wall Street analysts familiar with the sale process for Gottschalks Inc. said the book, or prospectus, was sent out by UBS Investment Bank about six weeks ago. Several of those sources also confirmed that Wal-Mart was given a copy of the book. In addition, one credit analyst said Wal-Mart "does not typically receive such books."

A sale of Gottschalks to Wal-Mart would mean yet another department store name would disappear from the American retail landscape, observers said.

Why Gottschalks? There is speculation that an acquisition of Gottschalks would give Wal-Mart immediate entry into the northern California market. Gottschalks has 38 stores in California, half of them in northern California, slightly over a quarter in Southern California and a handful are in central California. The retailer has 60 stores, with annual revenue of $687 million. Gottschalks' market capitalization is $183 million, and it carries an enterprise value of $298 million.

Among the northern California sites are stores in Antioch, Capitola, Clovis, Davis, Eureka, Fresno, Modesto, Oakhurst, Redding, Sacramento, Santa Rosa, Stockton, Woodland and Yuba City. In central California, Gottschalks operates in Bakersfield, Hanford, Palmdale and San Luis Obispo. The balance of the California stores are in the southern part of the state, in Palm Springs, Riverside, the San Bernadino area and in other Los Angeles suburbs.

In terms of company-owned real estate, "Gottschalks owns six stores, and they are in California, in Antioch, Eureka, Hanford, Palmdale, San Luis Obispo and Yuba City," said Mark Montagna, analyst at C.L. King & Associates.

Gottschalks operates eight stores in Washington, six in Alaska, four in Oregon and two each in Idaho and Nevada. According to Montagna's estimates, the average store size is 90,000 square feet, although the boxes range from as small as 40,000 square feet to as large as 160,000 square feet.

To be sure, the California sites wouldn't be large enough to support Wal-Mart's supercenters, but would still give the chain a sizable presence for its other store formats. Wal-Mart could have some competition. British grocery retailer Tesco is gearing up for an expansion into the U.S. And the Dubai investment firm Istithmar is also looking at Gottschalks, as first reported in WWD.Opening bids are expected by early June, financial sources said, some of whom added that Gottschalks was also exploring the option of selling the real estate it doesn't want to develop.

Gottschalks hasn't disclosed whether it prefers to sell the entire company or is just seeking buyers for some of its real estate. In December 2006, the company said it hired UBS to assist its special committee in exploring alternatives.

A spokesman from Wal-Mart declined to comment, and James Famalette, chief executive officer of Gottschalks, could not be reached.

A credit analyst said, "Wal-Mart is definitely interested in the Gottschalks real estate, and not necessarily just in northern California. They are interested in some of the other store locations, too."

The credit analyst also said Wal-Mart might be willing to buy the entire chain, because the different size boxes could be used for various Wal-Mart concept stores. One thing was certain: "Wal-Mart is definitely not looking to keep the Gottschalks name," the credit analyst said.

Wal-Mart has been trying to get into the California market in a big way for some time, but faced vehement opposition from local communities. According to Wal-Mart's Web site, it operates 164 stores in California, but only 10 are supercenters. The discounter launched the supercenter format in 1988, and in 2002 said it planned to open 40 such stores in California. Opposition from multiple fronts has stalled that expansion. Now, Wal-Mart is said to be keen on opening another 40 or so sites in California by 2008, but with a focus in urban areas, and not necessarily in the big-box concept.

In July 2006, the city of Inglewood, a Los Angeles suburb, toughened requirements for big-box retailers. Two years earlier, voters in the same city defeated a ballot initiative to allow a 60-acre Wal-Mart complex. Under the Inglewood superstore ordinance, all new units greater than 100,000 square feet with more than 10 percent of merchandise dedicated to nontaxable items, such as groceries, which are nontaxable in California, are required to conduct a cost/benefit assessment regarding the impact of the new units on the working-class suburb. Los Angeles and Alameda County in northern California have similar local requirements.Wal-Mart also found itself down out of luck in a legal battle in July 2006, when the California Supreme Court rejected the discounter's appeal of a ruling that restricts big-box superstores in Turlock. Officials in Turlock, in Stanislaus County, enacted the ordinance in 2004. The state court of appeals in Fresno in April 2006 had upheld the ordinance.

Separately, in the same month, Wal-Mart lost another battle when a federal court judge in Fresno dismissed the discounter's constitutional challenge to the ordinance. In short, the federal ruling allows cities to determine their own land-use planning. Land use and related environmental factors are some of the key issues raised in the communities throughout parts of the U.S. where Wal-Mart has been rebuffed.

The Bentonville, Ark., discounter has had a hard time gaining entry into certain markets, such as California and New York, due to vigorous campaigning mostly from labor unions and local community groups. Unions are concerned that Wal-Mart doesn't pay enough, and that many associates are part-time and therefore lack certain benefits such as health care. Local communities and churches and business associations complain a supercenter would cause congestion along the streets and put community mom-and-pop retailers out of business.

The battle against Wal-Mart has also resulted in some creative tactics, at least in California. In June 2006, the City Council in Hercules, an affluent Bay Area suburb near San Francisco, voted to seize via eminent domain 17 acres of land where Wal-Mart had hoped to build a shopping center. The discounter initially sought to open a 142,000-square-foot store on the San Pablo Bay waterfront, not far from Hercules. That plan was voted down by the city council and Wal-Mart presented a scaled-down format that included outdoor eating areas. Hercules then invoked eminent domain.

As Wal-Mart fought these and other battles in different markets, it has waged a public relations campaign aimed at bolstering its image. In 2006, Wal-Mart was the largest corporate cash contributor to communities in America — it gave more than $270 million to 4,000-plus communities.

Robert Passikoff, president of marketing consultant Brand Keys, which conducts customer loyalty surveys, said the most recent contribution was completed on March 31.

"We found that the store reputation overall for discounters only makes a 20 percent contribution to [consumer] loyalty. In terms of reputation, you are talking about things like how they take care of people, are they good corporate citizens and do they take care of the community. For years, people have been beating up Wal-Mart about their labor practices. Wal-Mart has lost some engagement and loyalty bonds from some of the bad press affecting its store reputation, but [from our survey] their weakness is due to two other areas: perception of merchandising range and shopping experience," Passikoff said.The marketing consultant said that merchandise range and shopping experience accounted for 50 percent of customer loyalty to a particular retailer; 30 percent is attributable to convenient location and value. The 20 percent accounted for by reputation is inconsequential, he noted.

In the Brand Keys Customer Loyalty Engagement Index, which is compiled twice a year, Wal-Mart ranked third in the discounter group. In first place was Target, followed by Costco. Kohl's placed fourth after Wal-Mart and Kmart was in last place.

There are plenty of alternatives to Wal-Mart's buying Gottschalks, however. C.L. King's Montagna believes Gottschalks will most likely be sold to a private equity fund because the sector has access to large pools of cash. He added that the real estate could go to a developer. The retailer owns a 36 percent stake in its headquarters in Fresno, and owns the land that its distribution center occupies. That land is about 76 acres, and neighboring acreage is sought after because a Hampton Inn is being built nearby and an agreement has been reached by Station Casinos with the Mono Indian tribe to manage the construction and operation of a proposed casino in the area, according to Montagna.

According to the analyst, Gottschalks' management has been on the right track. The home department has been shrinking to make room for shoes, accessories and cosmetics, as well as apparel.

Montagna also said the Gottschalks name still had value and the retailer, with its 100-year history, had a loyal customer base. "It's a viable concept going forward. Developers building strip centers want them. As Macy's goes more upscale, that will give Gottschalks more opportunity to expand," he said.

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