By  on October 1, 2007

FRESNO, Calif. — In an era that’s seen the rise of the national department store and the decimation of its regional competitors, it appeared that Gottschalks was destined to become the latest M&A casualty.

After the struggling West Coast chain initiated a strategic alternatives review late last year, analysts speculated the retailer could sell for upward of $240 million. Stock prices spiked this past spring and summer as rumors flew that retail investment firms and big-box behemoths like Wal-Mart were courting Gottschalks, a longtime retail icon in secondary markets like California’s Central Valley.

But whether it was a choice or simply a dearth of appealing suitors, Gottschalks executives decided not only to go it alone, but to also redefine the company’s image.

“I don’t see us viewing our future as being a regional department store, but as a specialty department store,” Gottschalks chairman and CEO Jim Famalette told DNR during an interview at company headquarters in Fresno, Calif. “We really need to think that the future is a smaller concept, soft-line specialty store.”

Famalette declined to discuss details of the company’s decision not to sell to potential buyers, which reportedly included J.C. Penney Co. Inc., Dillard’s and the investment firm that owns rival California chain Mervyns. However, he speculated that the current crunch in the credit market may have thwarted the possibility of any merger or sale of the company, which operates 59 stores in six states.

But buoyed by a recent $200 million amended loan from GE Commercial Finance Corporate Lending, the retailer expects to open three doors a year through 2010—an about-face from the last five years, which saw the closing of 15 Gottschalks locations, mainly in the Pacific Northwest. Only one new door opened in the same period.

ew locations will be part of lifestyle-driven, mixed-use retail developments. With retail space averaging around 55,000 square feet, the stores will be significantly smaller than many existing, mall-based locations, many of which are in the 120,000- to 200,000-square-foot range.

The first door in the new expansion plan will open next month in Elk Grove, Calif., a suburb of Sacramento. Additional smaller doors in northern California and Oregon are expected to open in fall 2008.

“There’s a change going on in the department store retail world, and it’s not just about consolidation,” Famalette said. “It’s very difficult to identify multiple locations for new department stores to be built. To legitimately wait for large footprints to become available, I might be lucky to open a story every year or two.”

A smaller footprint also means that added doors will devote significantly less square footage to hard goods, a particularly weak category for the retailer in recent months. The company blamed weak home furnishing sales in part for a worse-than-expected second-quarter loss of $4.8 million, or 35 cents per share, compared with income of $486,000, or 4 cents, in the same year-ago quarter.

Cosmetics, shoes and women’s apparel will be the drivers in new stores, Famalette said. In existing stores, hard goods, which currently comprise about 18 percent of overall sales, will decrease to as low as 10 percent within the next two years.

“It’s a wise move,” said Mark Montagna, a specialty retail analyst for CL King & Associates. “Cosmetics and perfumes have a high profit margin—it’s the one area that department stores have done a good job at defending their turf against specialty stores. And with less space, you have to cherry-pick the best merchandise for your store, which should mean fewer markdowns.”

Though Montagna had advocated the sale of the company, he said the new GE loan is a vote of confidence for Gottschalks, which recently approved a repurchase of two million shares of its common stock over the next 12 months.

In men’s apparel, Famalette said the company is considering bringing Tommy Hilfiger back into its product mix. Gottschalks will continue to broaden its surf/skate segment, which currently includes Hurley and Fox. The company recently inked a deal to carry Volcom, with an initial test run set for 19 stores.

Gottschalks’ desired image as a modern, easily navigable specialty store is crucial to the success of its youth-driven labels and other soft goods, Famalette said. “We don’t want these [customers] to think we’re this old dowdy department store. So in a specialty store concept, we’re not going to appear quite as old-fashioned.”

Therein lies the challenge for a 103-year-old retailer, said George Whalin, founder of Retail Management Consultants in Carlsbad, Calif. “Anytime you try to overcome your own history, you have to redefine the company, change your logo, the way you advertise, everything you can to make it clear that you’re not the same old business,” he said.

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